Mike Cintolo is an industry-leading growth stock expert. Here, the editor of Cabot Top Ten Trader looks at two timely stocks in the beverage and coffee sector — Keurig Dr. Pepper (KDP) and Starbucks (SBUX).
Keurig Dr. Pepper looks like a special situation that is back at new highs despite the wobbly market, thanks to some intriguing potential synergies, the prospects for long-term growth and a dash of M&A activity.
The new, combined company (the merger was completed in the summer) is a top 10 player among U.S. food and beverage firms, as it’s a leader in both coffee (Keurig) and flavored drinks (with numerous top brands like 7Up, Mott’s, Shweppes, Canada Dry, A&W plus the namesake brands).
Of course, growth here won’t be rapid (the top brass expects 2% to 3% sales growth, in-line with the industry), but expects $600 million of annual merger synergies by 2021, as well as EBITDA growth of 11% and earnings growth of 16% (off a base of $1.05 per share this year) annually through 2021.
The strong outlook funds a tidy dividend (2.3% annually) and some M&A, too — the firm bought Core Nutrition in September for $435 million (bottled water, fruit hydration) to broaden its portfolio, with some rumors it also might dip a toe into the cannabis market.
One other positive: Mondelez (MDLZ), the large confectionery outfit, owns nearly 14% of the company. There’s nothing revolutionary here, but Keurig Dr. Pepper could be a new emerging blue chip in the slow, steady consumer staples field.
Keurig Dr. Pepper’s merger was finalized in July, so anything before that doesn’t really apply to the chart. The stock fell to $22 in early October. But the stock has perked up nicely since then despite the market environment, lifting nicely to new highs on Halloween and holding those gains. We’re OK nibbling on dips.
You don’t often see big, liquid blue-chip stocks in our Top Ten, but Starbucks appears to be near the start of a new upleg after investors reacted very positively to its quarterly report. In Q3, overall sales lifted 11%, but the focus was on same-store sales growth, which popped 3% overall and 4% in the U.S., both of which topped estimates and reversed the terrible Q2 results.
And there’s high hopes going forward given the company’s well-received price hikes, some innovations on the product side (cold coffee), continued store growth (7.1% increase in the store count globally in the next 12 months) and big amounts of share buybacks (share count down 7% from a year ago!) and a solid dividend (2.5% annual yield).
Granted, nobody is saying the days of 20%-plus growth are set to return—management expects same-store sales to chug ahead 3% to 4% during the next year, with total currency-neutral revenue growth in the high single digits. But big investors are sniffing out some better-than-expected surprises, with some possible initiatives revealed at the company’s Investor Day next month.
After a couple of years in the doghouse, Starbucks is an intriguing turnaround situation. The stock spent a long 19 months in a trading range between $50 and $65 from October 2015 through this spring. And then things got worse, with the stock diving after earnings in June, bringing the stock down to $47!
But that now looks like a shakeout, as the stock rose steadily to $60 last month, held up very well during the market debauchery, and then gapped back to its old highs after earnings. It might need a little time, but if you want in, you can buy a little on weakness.
