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Keurig Dr Pepper (KDP) Q4 Earnings Meet Estimates, Rise Y/Y

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Keurig Dr Pepper Inc. (KDP - Free Report) reported fourth-quarter 2019 results, wherein sales missed the Zacks Consensus Estimate while earnings matched the same. Notably, the company’s top and bottom lines improved year over year. Results reflected strong underlying sales growth across all segments, margin expansion and reduced debt.

Despite sales and earnings increase year over year, shares of the company declined 1.7% during the trading session on Feb 27. Lower-than-expected top-line performance might have hurt investors’ sentiment.

However, we note that shares of this Zacks Rank #2 (Buy) company have increased 5.2% in the past six months compared with the industry’s growth of 4.5%.

Keurig Dr Pepper, Inc Price, Consensus and EPS Surprise

Q4 in Detail

Adjusted earnings of 35 cents per share improved 16.7% year over year and came in line with the Zacks Consensus Estimate. This improvement was driven by strong underlying growth across all segments, adjusted operating margin expansion and reduced indebtedness.

Net sales of $2,934 million marginally missed the Zacks Consensus Estimate of $2,964 million but were up 4.3% from net sales of $2,813 million in the year-ago quarter. The increase was driven by higher volume/mix of 5.3% and favorable foreign currency translation of 0.1%. These gains were partially offset by unfavorable net price realization of 0.7%.

The company’s net sales increased 4.6%, excluding the one month of residual sales from BodyArmor prior to its exit in the fourth quarter of 2018 and the impact of foreign currency translation.

In the fourth quarter, the company benefited from strong in-market performance. Keurig Dr Pepper witnessed dollar consumption growth, with market share gains across its several major categories — including CSD's3, shelf stable fruit drinks and shelf stable apple juice. The uptick was backed by strength in Dr Pepper and Canada Dry CSDs, Snapple juice drinks and Motts apple juice.

Further, in coffee, retail consumption for single-serve pods manufactured by KDP rose nearly 4% in channels tracked by IRI. The coffee business also witnessed robust growth in untracked channels. Further, dollar market share in tracked channels in the United States was 82% in the fourth quarter, which was even with year-ago quarter.

Adjusted operating income grew 13% year over year to $813 million, driven by strong net sales growth as well as solid productivity and merger synergies. This was partly offset by inflation, primarily in input costs and logistics, and higher marketing. Meanwhile, adjusted operating margin expanded 210 basis points (bps) to 27.7%.

Segmental Details

Sales at the Beverage Concentrates segment rose 8% year over year to $380 million compared with $352 million in the year-ago period. Net revenues primarily benefited from 3.8% higher net price realizations and a 4.2% increase in volume/mix.

Sales at the Packaged Beverages segment totaled $1.21 billion, up 2.9% from net sales of $1.18 billion in the year-ago quarter. This can be primarily attributed to a 3.8% increase in volume/mix and 0.2% higher net price realizations. This was offset by 1.1% due to unfavorable impact from the exit of BodyArmor during the fourth quarter of 2018.

Sales from the Latin America Beverages segment improved 11% to $133 million compared with net sales of $120 million in the prior-year quarter. This was on account of 4.9% rise in price realization, increase in volume/mix of 2.6% and favorable foreign currency translation of 3.3%.

The Coffee Systems segment’s sales increased 4% to $1.21 billion from $1.16 billion recorded in the year-ago quarter. The increase was backed by improved volume/mix of 7.6%, offset by net price realization of 3.5% and unfavorable foreign currency translation of 0.1%. Volume/mix grew 7.6%, benefiting from a 10.3% increase in pod volume and 0.9% rise in brewer volume.

Financials

Keurig Dr Pepper ended the fourth quarter with cash and cash equivalents of $75 million as of Dec 31, 2019, compared with $83 million as of Dec 31, 2018. Long-term obligations totaled $12,827 million and total stockholders’ equity was $23,257 million. Net cash provided by operating activities totaled $2,474 million as of Dec 31, 2019.

Other Developments

In a separate press release, the company declared that it has entered into a long-term, strategic agreement with Nestle USA to manufacture and distribute Starbucks SBUX branded packaged coffee in K-Cup pods in the United States and Canada.  The agreement with Nestle will replace the existing K-Cup pod contract between KDP and Starbucks Corporation, following a transition period.  The company has not yet disclosed the financial terms.

Outlook

Keurig Dr Pepper provided guidance for 2020. The company anticipates adjusted earnings per share growth of 13-15%. For the three-year (2018-2021) period, it continues to expect adjusted earnings growth in the range of 15-17%, which is in line with the long-term target.

The company expects net sales growth of 3-4% in 2020 compared with its long-term sales growth target of 2-3%. Sales are expected to increase owing to the investments that the company is planning across the business, including in the areas of innovation, new partnerships, in-store execution, marketing and research and development.

Further, it anticipates capturing merger synergies of $200 million in 2020, consistent with the long-term target of capturing $200-million synergies every year between 2019 and 2021.

Adjusted other net expenses are projected to be $30 million in 2020. Adjusted interest expenses are likely to be $530-$545 million, indicating ongoing deleveraging and gains from unwinding interest rate swap contracts. Adjusted effective tax is expected to be 24.5-25%, with outstanding shares estimated at 1,425 million.

Additionally, the company expects leverage ratio of 3.5 to 3.8 at the end of 2020. Further, it reiterated its leverage ratio target of less than 3.0 in two to three years, since the closing of the merger in July 2018.

Other Stocks to Consider

Brown-Forman Corporation BF.B has a long-term earnings growth rate of 7.5% and a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Monster Beverage Corporation (MNST - Free Report) has a long-term earnings growth rate of 13.5% and carries a Zacks Rank #2.

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