Keurig Doctor Pepper Stock: Great Co. But Chart Not Favorable (NASDAQ: KDP)
Full disclosure: I drink Diet Dr. Pepper religiously and think it’s the best low-calorie soft drink on the planet. No, you can’t change my mind.
Investment thesis: It’s a good company. But the stock recently peaked and is now heading lower. Wait for a clear background to form, then acquire it.
Keurig Doctor Pepper (NASDAQ: KDP) is a manufacturer of soft drinks:
Keurig Dr Pepper Inc. operates as a beverage company in the United States and internationally. It operates through Coffee Systems, Packaged Beverages, Beverage Concentrates and Latin America Beverages segments. The Coffee Systems segment manufactures and distributes various end products related to its coffee systems, K-Cup pods and infusers, as well as specialty coffee. This segment sells its brewers through third-party distributors and retail partners, as well as through its website at keurig.com. The Packaged Beverages segment is engaged in the manufacture and distribution of packaged beverages of its brands; toll manufacturing of various private label and emerging brand beverages; and the distribution of packaged drinks for its partner brands. The Beverage Concentrates segment manufactures and sells beverage concentrates mainly under the brands of Dr Pepper, Canada Dry, Crush, Schweppes, Sun Drop, Sunkist soda, A&W, 7UP, Squirt, Big Red, RC Cola and Hawaiian Punch.
It is the third largest company in this sector. But the two biggest ones (Coke and Pepsi) are much bigger. (KDP) has a market capitalization of $53 billion while Coke and Pepsi are $260 and $220 respectively.
My standard format when analyzing a specific company is to first analyze the macroeconomic background of the company, followed by a look at the financials and finally the stock chart.
The total number of jobs in establishments (left) is growing at a healthy pace, which has caused the unemployment rate (right) to drop to 3.8%.
A strong labor market supports rising incomes. Total income less transfer payments (left) is just off a 5-year high, while the year-over-year percentage change in income (right) is rising at a healthy pace.
Rising revenue is supporting a surge in sales, which explains why total sales for general merchandise stores are near a 5-year high.
Overall, the macroeconomic situation is very positive.
Now on to the finances:
Revenues have mostly increased over the past 10 years. Since (KDP) is a mature company, this is important.
Over the past 10 years, gross, operating and net margins have increased – another good sign.
The first two rows show cash flow from operations and investments. The third line shows the difference. This result has been positive in nine of the last 10 years, which means that the company generates enough cash to fund current investments. The next line shows the total dividend payments, which are subtracted from the number in the line above. The difference shows that in eight of the past 10 years the company generated enough cash to pay its dividend. The two negative years involved large cash acquisitions, which adequately explains the shortfall.
The last three rows show another measure of cash flow – earnings before interest and taxes. The bottom line subtracts interest payments and dividend payments from EBIT. The results are in the bottom line.
Overall, it’s a solid company. Revenues increase, margins increase, and the business has sufficient cash flow.
But there are three downsides that militate against buying this stock right now.
First, it pays only 1.98%. It is too little in the current context.
Second, analysts are downgrading the earnings outlook:
A majority of analysts have lowered earnings estimates.
(KDP) has recently seen a strong recovery. But it’s about to end. The stock and its sector peaked against the SPY. Both are directed downwards.
Finally, the stock recently printed a triple top and sold off a bit.
Finances and the economic environment indicate what to buy. Either way, (KDP) is a solid investment. Charts tell us when to buy. There, the answer is clearly “not now”.