Report
Zain Akbari
EUR 850.00 For Business Accounts Only

Morningstar | Merger Synergies Should Lead to Margin Growth for Keurig Dr. Pepper

In our view, the combination of Dr Pepper Snapple with Keurig Green Mountain has created a firm with a competitive edge, as Keurig Dr Pepper should be able to leverage its portfolio of leading brands to reinforce its retail relationships. We also appreciate a reduced exposure to the soda category, where prospects for volume growth remain limited. Though the combined entity benefits from enhanced scale, with pro forma revenue around $11 billion, we note on an absolute basis its sales will remain materially below competitors Coca-Cola ($32 billion in 2018) and Pepsi ($65 billion in 2018).Keurig Dr Pepper has material brand strength. Its portfolio includes several beverage brands that have the number 1 or number 2 positions in their categories (such as Dr Pepper, 7UP, Canada Dry, and Mott’s), and, acccording to management, maintains a 22% share of the U.S. carbonated soft drink market. Further, Keurig remains the leader in the North American single-serve coffee category, with brewers installed in around 28 million homes and offices (around 22% penetration). The prevalence of Keurig brewers has made the firm an attractive partner for firms seeking a position in the fast-growing single-serve coffee category (we estimate around 10% average growth in the U.S. over the past five years); the firm has above 75 owned, licensed, and partner brands in its system. We surmise Keurig Dr Pepper will continue to secure valuable shelf space for its offerings, as retailers depend on leading brands to drive store traffic.We expect gains to be driven by a consolidated distribution network and economies of scale, as Dr Pepper’s DSD and warehouse delivery system should be complemented by Keurig’s e-commerce capabilities. Management is targeting $600 million in annualized cost savings (or 5%-6% of 2018 pro forma sales) by 2021, due to improvements in warehousing, procurement, and overhead costs. We find this achievable given Keurig’s robust adjusted operating margin improvement since being taken private (26% in 2017, versus 19% in 2015), and expect the firm’s adjusted operating margin to average a high-20s rate over the next five years as its efforts to extract synergies take hold.
Underlying
Keurig Dr Pepper Inc.

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.

Provider
Morningstar
Morningstar

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.

We have operations in 27 countries.

Analysts
Zain Akbari

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