A month has gone by since the last earnings report for Keurig Dr Pepper, Inc (KDP). Shares have added about 14.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Keurig Dr Pepper, Inc due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Keurig Dr Pepper Q4 Earnings Miss Estimates, Sales Beat

Keurig Dr Pepper reported fourth-quarter 2020 results, wherein the top line surpassed the Zacks Consensus Estimate, while earnings lagged expectations. However, both sales and earnings increased year over year. Results gained from solid performance across all segments, except for Beverage Concentrates. Additionally, strong market share gains and improved at-home penetration aided results.

Q4 in Detail

Adjusted earnings of 39 cents per share improved 11.4% year over year but missed the Zacks Consensus Estimate of 40 cents. Year-over-year growth can be attributed to strong top-line growth, an increase in adjusted operating income, lower interest expenses and effective tax rate.

Net sales of $3,121 million surpassed the Zacks Consensus Estimate of $3,049 million and increased 6.4% from $2,934 million reported in the year-ago quarter. The increase in top line was driven by market share gains across its portfolio and accelerated household adoption of the Keurig system. Notably, the company’s volume/mix grew 6.3%, while net price realization was up 0.3%. Robust performance across all the operating segments, except for Beverage Concentrates, also contributed to sales growth. On a constant-currency basis, net sales increased 6.6% year over year.

In the fourth quarter, the company benefited from strong in-market performance in tracked channels, with dollar market share improving more than 90% of KDP’s cold beverage retail base. Growth was driven by share gains across several major categories — including CSD’s3, premium unflavored water, teas and fruit drinks, vegetable juice, apple juice, and apple sauce.

In coffee, retail consumption for single-serve pods manufactured by KDP advanced more than 7% in channels tracked by IRi. This rise was mainly attributed to augmented growth in e-commerce, offset by declines in the away-from-home businesses, particularly office and hospitality. In the United States channels, the market share for pods manufactured by KDP was a robust 83% in the fourth quarter.

Adjusted operating income advanced 5.5% year over year to $858 million, driven by lower discretionary expenses, improved productivity and merger synergies. On a constant-currency basis, adjusted operating income increased 5.7%. Meanwhile, adjusted operating margin contracted 20 basis points (bps) to 27.5%.

Segmental Details

Sales in the Beverage Concentrates segment declined 5.8% year over year to $358 million compared with $380 million in the year-ago quarter. Net revenues were primarily impacted by a 4.5% decline in volume/mix and a 1.3% fall in net price realizations. The decline in revenues can be attributed to continued pressures from COVID-19 due to reduced consumer mobility in the restaurant and hospitality channels. Total shipment volume dropped 3.4%, affected by a decline in the fountain foodservice business due to the coronavirus outbreak.

Sales in the Packaged Beverages segment totaled $1.31 billion, up 7.9% from net sales of $1.21 billion in the year-ago quarter. This can be primarily attributed to a 6.1% increase in volume/mix and a 1.8% rise in price realizations. Volume/mix was aided by continued strong market share growth across the portfolio.

Sales in the Latin America Beverages segment rose 2.3% to $136 million from $133 million in the prior-year quarter. On a constant-currency basis, the segment’s sales increased 8.3%. Revenue growth was driven by a 2.3% increase in volume/mix and a 6% rise in price realization, partly offset by unfavorable currency translation impacts of 6%.

The Coffee Systems segment’s sales advanced 9.1% to $1.32 billion. The increase was backed by a 10.2% increase in volume/mix and 0.2% tailwinds from favorable currency, somewhat offset by a lower net price realization of 1.3%. Net sales, on a constant-currency basis, were up 8.9%. Growth in volume/mix stemmed from a 7.4% increase in pod volumes on a rise in at-home consumption, offset by a decline in the away-from-home business. Meanwhile, brewer volume advanced 28%, driven by robust innovation and increased shipments to retailers during the holiday season.

Financials

Keurig Dr Pepper ended 2020 with cash and cash equivalents of $240 million. As of Dec 31, 2020, it had long-term obligations of $11,143 million and total stockholders’ equity of $23,829 million (excluding non-controlling interest). Net cash provided by operating activities totaled $2,456 million as of Dec 31, 2020.

The company generated a free cash flow of $685 million in the fourth quarter, which led to a $410-million reduction in bank debt. In 2020, it generated $2.20 billion of free cash flow and lowered total financial obligations by $1.12 billion.

Outlook

Keurig Dr Pepper anticipates another strong year in 2021, keeping it on track to reach its three-year targets announced at the time of the merger in 2018. It expects sales to exceed the three-year target of 2-3% average annual revenue growth in 2021. The company expects constant-currency net sales growth of 3-4% in 2021, backed by investments in innovation and marketing, gains from recent partnerships, and ongoing strong in-market execution.
 
Additionally, it estimates double-digit growth in adjusted earnings per share, enabling it to meet its three-year target of 15-17% average annual growth. Specifically, adjusted earnings per share are expected to increase 13-15%, driven by robust sales growth and continued merger synergies and productivity, lower interest expenses, and higher effective tax rate.

Other assumptions related to the guidance include delivering merger synergies of $200 million in 2021, bringing the average three-year total to $600 million, which is in line with the company’s merger target. In 2021, adjusted interest expenses are estimated to be $505-$515 million, with adjusted effective tax rate of 23.5-24% and average shares outstanding of 1,430 million.

Moreover, the company now expects management leverage ratio at or below 3.0X at the end of 2021. This is in line with its management leverage ratio target of less than 3.0X in two to three years from the closing of the merger in July 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

At this time, Keurig Dr Pepper, Inc has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Keurig Dr Pepper, Inc has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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