Keurig Dr Pepper Inc. (KDP - Free Report) reported fourth-quarter 2018 results, wherein earnings matched estimates while sales missed. However, the company’s top and bottom lines improved year over year due to gains from the merger between Keurig and Dr Pepper in July. Additionally, the company witnessed strong in-market gains as well as market share growth for carbonated soft drinks (CSD), single-serve coffee and other categories, which helped it reach target for 2018.
Despite this, the Keurig Dr Pepper stock lost investors’ confidence due to the short fall in sales and a lower-than-expected earnings view for 2019. Shares of this Zacks Rank #3 (Hold) company has declined nearly 6.6% on Feb 28.
Investors seemed to be unhappy with the sales lag caused by decline in sales for the coffee systems business mainly due to lower volume for coffee brewers. Further, the company’s guidance for adjusted earnings per share was $1.20-$1.22 for 2019, which was short of the Zacks Consensus Estimate of $1.24.
Nonetheless, management pointed out that the earnings growth forecast of 15-17% was in line with the long-term target for the 2018-2021 period, which was set out at the time of the merger.
Overall, shares of Keurig Dr Pepper belonging to the Zacks Beverages – Soft Drinks industry have declined 4.6% in the past three months as compared with the S&P 500 that increased 0.7%.
Adjusted earnings per share of 30 cents improved 25% year over year and were in line with the Zacks Consensus Estimate. The improvement was aided by an increase in adjusted pro forma operating income and considerable decline in interest expenses due to reduced indebtedness and unwinding of several interest rate swap contracts.
Notably, the company repaid about $940 million of bank debt after the closing of the merger, driven by strong operating performance as well as effective working capital management.
Net sales of $2,813 million missed the Zacks Consensus Estimate of $2,852 million but more than doubled (up 140.4%) from the year-ago quarter figure of $1,170 million. The solid year-over-year improvement was attributed to benefits of the merger. Pro forma net sales improved 0.5% on the back of 2.7% growth in volume/mix, offset by 1.8% adverse effects from changes in Allied Brands portfolio in the Packaged Beverages segment and 0.4% impacts from currency headwinds.
During the fourth quarter, the company also benefited from strong retail market performance measured by IRI. It reported market share gains in both units and dollars for its CSD portfolio, backed by strength in Dr Pepper and Canada Dry brands. Further, its coffee portfolio gathered market share in units and dollars, driven by share gains for pods produced by Keurig Dr Pepper.
Adjusted pro forma operating income grew 12.9% year over year to $720 million, driven by solid sales growth, strong productivity, reduced SG&A expenses and lower marketing costs, offset by higher input and logistics costs. Additionally, negative comparison from $21-million gain on Bai recorded in the year-ago quarter impacted operating income. Moreover, adjusted operating margin expanded 280 basis points (bps) to 25.6%.
Revenues for the Beverage Concentrates segment rose 4.8% year over year to $352 million, backed by higher realized prices and favorable volume/mix, offset by unfavorable currency rates.
Sales for the Packaged Beverage segment were $1.18 billion, up 0.1% from the year-ago quarter. The increase reflected from volume/mix gains and increased price realization, partly offset by negative effects of the changes in Allied Brands portfolio and currency translations.
Revenues from the Latin America Beverage segment improved 1.7% to $120 million, driven by higher price realization and volume/mix growth, offset by unfavorable currency.
The Coffee Systems segment’s sales dipped 0.5% to $1.16 billion from $1.17 billion in the year-ago quarter. The decline stemmed from lower pricing as well as adverse currency effects, partly compensated by volume/mix growth. Volume/mix grew 2.9%, benefiting from increase in K-Cup pod volume, offset by lower volume for brewers due to shipment timing between the third and fourth quarters of 2018, and the discontinuation of certain legacy Keurig brewer models. However, recently launched innovation products are witnessing favorable trends in the market.
Keurig Dr Pepper ended 2018 with cash and cash equivalents of $83 million as of Dec 31, 2018, compared with $90 million as of Dec 31, 2017. Long-term obligations totaled $14,201 million and stockholders equity was $22,533 million. Net cash provided by operating activities totaled nearly $1,613 million as of Dec 31, 2018.
Despite a strong end to 2018, Keurig Dr Pepper expects the operating environment to be more challenging in 2019.
The aforementioned earnings view for 2019 is supported by net sales growth of about 2%, which is also in line with the company’s long-term sales growth target of 2-3%.Further, it anticipates capturing merger synergies of nearly $200 million in 2019, consistent with the long-term target of capturing $200-million synergies every year between 2019 and 2021.
Other non-operating income/expense is projected to be $30 million in 2019. Adjusted net interest expense is likely to be $570-$590 million, driven by ongoing efforts to lower debt and benefits from the unwinding of interest swap contracts. Adjusted effective tax is expected to be 25-25.5%, with outstanding shares estimated at 1,420 million.
Additionally, the company expects significant cash flow generation and rapid deleveraging, targeting a leverage ratio of less than 3.0 in two to three years from the closing of the merger in July 2018.
Don’t Miss These Better-Ranked Stocks in the Beverage Industry
Monster Beverage Corporation (MNST - Free Report) has a long-term earnings growth rate of 16% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Coca-Cola European Partners PLC (CCEP - Free Report) has a long-term earnings growth rate of 8.7% and a Zacks Rank #2.
Diageo plc (DEO - Free Report) , also a Zacks Rank #2 stock, has a long-term earnings growth rate of 8.4%.
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