Keurig Dr. Pepper (KDP) is a leading beverage company in North America; it was formed by the July 2018 merger of Keurig Green Mountain Group and the publicly traded Dr. Pepper Snapple Group, recalls Hilary Kramer, editor of Value Authority.

The new company's Coffee Systems (approximately 40% of sales) sells Keurig K-Cup coffee makers and owns related coffee pods from Green Mountain, Coffee Roasters and The Original Donut Shop. It also has licensing agreements with several other leading brands to make pods for Keurig coffee makers.

Its Packaged Beverages (approximately 46% of sales) either owns or has distribution rights for well-known brand names like Snapple, Mott’s Yoo-Hoo, Evian and Hawaiian Punch.

These beverages are made in the United States and sold through either the company’s distribution system or third-party distributors. Walmart (WMT) is the company’s largest customer.

The combined company has done well financially since the merger. In 2019, the first full year of operations, earnings per share were up 17.3% to $1.22, aided by cost synergies.

Continued cost savings from the merger and lower interest rate expenses through the first nine months of this year helped EPS rise by 12.3%.

For the full year, the company expects EPS to be on the high end of its guidance of $1.38 to $1.40, and any profit in excess of that amount will likely be reinvested in marketing and brand building.

Given current sales trends, and the company’s continued cost savings and financial deleveraging, EPS estimates of $1.60 next year seem realistic.

At 19X these estimates, the stock is selling at less than a market multiple of 22X, and less than the 26X price-to-earnings ratio for Coca-Cola Companies (KO) and 24X for PepsiCo. (PEP).

While KDP may never reach the same valuation as these rivals, I believe it can close the gap if it can continue its recent strong execution. The stock is a buy below $31.75. My target is $36. The 2% dividend yield will add to total returns.

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