Here’s an interesting special situation, Keurig Dr. Pepper (KDP); just a couple of weeks ago, on July 9, Keurig completed its merger with Dr. Pepper Snapple Group, explains Mike Cintolo, editor of Cabot Top Ten Trader.
This move created the third-largest beverage firm in North America with combined annual revenues of around $11 billion and such well known brands as 7Up, Canada Dry, IBC Root Beer, Mott’s, Mr. & Mrs. T’s Bloody Mary Mix, Schweppes, Sunkist and Yoo-hoo, to go along with the firm’s namesake coffee and soda brands.
Obviously, there’s nothing revolutionary about soft drinks and coffee, but after a few years in the wilderness, Keurig is shaping up its operations and its brewer gross margins are moving toward breakeven.
Meanwhile, the firm has plenty of expansion potential still left (20% of U.S. households in the U.S. have a single-serve brewer vs. more than 65% in parts of Europe), and thinks it can achieve $600 million of total synergies, all of which should propel plenty of bottom-line growth.
At the company’s Investor Day in March, the firm said it expects sales growth of 2% to 3% annually through 2021, but EBITDA should rise 11% to 12% annually and earnings should total $1.05 or so in 2018 and grow 15% to 17% per year from there.
Throw in plenty of deleveraging and a solid early dividend (yield of around 2.4%) with potential increases, and we think this “new” stock could become an institutional favorite. We’re intrigued.
Technically, the stock’s chart is basically meaningless up until two weeks ago, but that action is very encouraging — the stock spiked on its first three days, rallying from $20 to $25, and has since moved straight sideways on a notable dry-up in volume (usually a sign no selling is coming to market).
Of course, it’s early, so we’ll see how it goes, but we’re OK starting small and building a position if the stock works higher.
