Morningstar | Long-Term Outlook Intact After Keurig Dr Pepper Posts 2Q Results; Shares Not Cheap
Wide-moat Keurig Dr Pepper posted solid second-quarter results for stand-alone Keurig Green Mountain and Dr Pepper Snapple. Dr Pepper Snapple on a stand-alone basis increased sales 5%, with a roughly 60% contribution from price/mix; this tracked ahead of our full-year outlook of below 4%. However, operating margin contracted around 170 basis points to 19% as commodity inflation and increased logistics costs, both of which have been weighing on firms across the industry, compressed profitability. We view these headwinds to be more near term in nature and think the company's efforts to take pricing--which weren't fully reflected in the quarter's results--and extract further cost savings from operations should allow for margin expansion over the long run.Keurig Green Mountain experienced roughly flat sales, as a 3% improvement in volume/mix was offset by a further decrease in pricing as Keurig continues to focus on the affordability of its fare. W e estimate that Keurig has brewers installed in 20% of North American homes and offices; w e think a reduction in pod pricing should help the firm increase its household penetration, as management has said that more than 60% of consumers cite pod price as a barrier to single-serve system adoption. Our forecast calls for mid-single-digit pod volume growth longer term. We were impressed to see substantial improvement in adjusted operating margin, expanding more than 290 basis points to above 30%, as Keurig continues to reap the benefits of its productivity initiatives.
We plan to lift our near-term margin forecast for Keurig Dr Pepper to incorporate these results, which should boost our $19.90 fair value estimate by a mid-single-digit percentage. We are reiterating our longer-term outlook for around 3% sales growth and mid-20s operating margin on average over our forecast. We continue to think that investors should wait for a more attractive entry point.
Keurig Dr Pepper is a beverage company with a portfolio of flavored (non-cola) carbonated soft drinks (CSDs), non-carbonated beverages, and is a producer of single serve brewing systems. The company's Coffee Systems segment develops and sells a variety of Keurig brewers, brewer accessories and other coffee-related equipment. The company's Packaged Beverages segment manufactures and distributes packaged beverages of its brands. The company's Beverage Concentrates segment manufactures and sells beverage concentrates. The company's Latin America Beverages segment participates mainly in the carbonated mineral water, flavored CSD, bottled water and vegetable juice categories.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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