Here's Why Hold Strategy is Apt for Keurig (KDP) Stock Now
Keurig (KDP) to benefit from strong market share gains, innovation and improvements in the away-from-home channel. Negative demand mix, higher costs a...
Keurig Dr Pepper Inc. KDP is well-placed for growth, owing to improvements in the away-from-home channel due to increased consumer mobility. It is also likely to benefit from strong market share gains, and in-market performances across categories and brands. Sales gains in the second-quarter of 2021 were driven by growth across all business segments, with the Beverage Concentrates and Latin America Beverages segments posting strong double-digit growth.
Driven by the above-mentioned factors, shares of Keurig have rallied 10.1% in the year-to-date period compared with the industry’s growth of 8%. The Zacks Rank #3 (Hold) stock has also comfortably outperformed the Consumer Staples sector, which advanced 4.9% in the same period.
In the past 30 days, the company’s estimates for 2021 and 2022 earnings per share have been unchanged. For fiscal 2021, its earnings estimates are pegged at $1.61 per share, suggesting 15% growth from the year-ago period.
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Factors Supporting Growth
The renowned beverage and coffee company in the United States and Canada generates annual revenues of more than $11 billion. It has a market capitalization of $49.2 billion. The company is on track with prudent cost-management actions. Moreover, investments in marketing, product innovation and technology upgrades are likely to yield results.
Keurig witnessed a strong in-market performance in the second quarter of 2021. The company witnessed dollar consumption growth, with market share gains across several major categories. These include CSDs, premium unflavored water, enhanced flavored water, apple juice, apple sauce, coconut water, Dr Pepper, Sunkist, A&W, 7UP and Squirt CSDs, CORE Hydration, Evian, Bai, Motts apple juice and apple sauce, Polar, and Vita Coco. The company has been seeing a slow recovery in restaurant traffic, which is supporting the Beverage Concentrate segment.
It expects increased household penetration across both hot and cold beverage portfolios to continue in the future. Its market share growth is being supported by efficient marketing and product innovation strategies. Keurig is also investing in boosting its distribution platforms and e-commerce operations.
In coffee, the dollar market share for Keurig-manufactured pods was a robust 83% in the second quarter, with improved share trends in its away-from-home channel. Within the untracked channels, e-commerce growth for K-Cup pods continued in the quarter, which more than offset the declines in the away-from-home office and hospitality businesses.
The stay-at-home directives amid the coronavirus pandemic led to a change in consumers’ behavior regarding what they are buying and where they are buying from. The company believes that the shifts may be lasting and may continue post-crisis. One such shift is the switch to in-home coffee consumption. The company notes that there has been strong growth in at-home coffee consumption due to the work-from-home trend and the inability to visit coffee shops.
Consequently, the Coffee Systems segment’s sales advanced 5.6% year over year to $1,101 million in the second quarter. At cc, net sales advanced 3.9%, owing to a higher volume/mix of 3.5% and favorable net price realization of 0.4%. Volumes/mix gained from pod volume and brewer volume growth. Growth in volume/mix stemmed from a 0.2% increase in pod volumes on rising at-home consumption, offset by a decline in away-from-home office. Brewer volumes rose 29% on higher consumer sales and gains from changes in the timing of Prime Day in the quarter.
Keurig has been witnessing robust top-line growth due to solid volume/mix benefits from the Packaged Beverages segment. The segment reported sales growth of 7.6% in the second quarter, driven by a favorable volume/mix of 6.2% and a higher net price realization of 1.1%. The Packaged Beverage segment has been gaining from at-home consumption trends as well as strong market share. It has been witnessing market share gains across several major categories.
Few Headwinds to Counter
Despite the strong results, Keurig is currently witnessing a negative demand mix, which is likely to continue through the rest of 2021. It is also reeling under higher input and labor costs, rising transportation and logistics costs, and labor shortages. Supply-chain disruptions have been negatively impacting the non-carb beverage unit’s sales and are likely to act as deterrents in the third quarter. The possibility of reduced or eliminated government subsidies also remains concerning.
Adverse changes in foreign currency are likely to continue hurting the Latin America Beverages segment’s net sales in the near term.
Better-Ranked Consumer Staples Stocks to Bet On
Albertsons Companies, Inc. ACI has a long-term earnings growth rate of 12%. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Coca-Cola Company KO, with a Zacks Rank #2 (Buy) at present, has a long-term earnings growth rate of 8.7%.
Sysco Corporation SYY, also a Zacks Rank #2 stock, has a long-term earnings growth rate of 9%.
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Keurig Dr Pepper, Inc (KDP): Free Stock Analysis Report
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