Coffee Joins Soda at Keurig Dr Pepper

09/13/2018 5:00 am EST

Focus: CONSUMER

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

A new stock in our portfolio is Keurig Dr Pepper (KDP), which was formed two months ago as a result of the merger between Keurig Green Mountain and Dr Pepper Snapple, explains Mark Skousen, editor of High-Income Alert.

It now is the seventh-largest food and beverage company in the United States with more than 125 brands, over 25,000 employees, more than 100 distribution centers and $11 billion in annual sales.

Keurig has a leadership position in specialty coffee, tea, soft drinks, bottled water products, juice drinks and mixers. It also markets the #1 single-serving coffee brewing system in the nation.

Its iconic brands include Green Mountain, Peet’s Coffee, Caribou Coffee, Newman’s Own, Krispy Kreme, Cinnabon, Donut House, Emeril, Canada Dry, Schweppes, Crush, Sunkist, RC, 7UP, Snapple, Mott’s, Hawaiian Punch, Rose’s, Yoo-hoo and Swiss Miss.

The combined company will enjoy robust sales, sharply higher profits and huge economies of scale. In fact, it’s already happening.

In the most recent quarter, Keurig enjoyed a 22% operating margin, while earnings are up 49% year over year. The stock also has a forward dividend of 7.6%.

I estimate Keurig will earn $1.06 a share this year and more than twice as much in 2019. And that may prove conservative.  At least, the insiders seem to think so.

Director Robert Singer bought 10,000 shares on Aug. 30 for $23.17 or $231,700. (Singer was chief financial officer for Gucci from 1995 to 2004 and CEO of Italian Food company Barilla Holdings from 2006 to 2009.)

The same day, Chief Corporate Affairs Officer Maria Sceppaguercio purchased 21,725 shares at $23.06, an investment of $501,100.

Derek Hopkins, who joined Keurig in 2015 and oversaw the integration with Dr Pepper, bought 22,000 shares for $22.94 or $505,000. That was two weeks ago. Last week, still more insiders piled in. Officers Jim Trebilcock and Andrew Loucks bought in for $676,448 and $248,520, respectively.

Clearly, these corporate insiders — who aren’t just well-informed about the company but have access to all sorts of material, non-public information about its business prospects -- feel the stock is clearly undervalued.

I do, too. And today, you can buy the stock just as inexpensively as they did.  So, pick up Keurig Dr Pepper at market. And place a sell stop at $18 for protection.

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