Keurig Dr Pepper stock (NASDAQ: KDP) is currently trading at $31 per share, which is 23% below its peak level of $40 seen in August 2022. Despite this, the stock has potential for growth, with analysts predicting a valuation of $38 per share, reflecting over 20% upside from its current levels. The underperformance of KDP stock can be attributed to a decline in overall volume/mix, particularly in its coffee segment, amid a weak consumer spending environment. However, with a valuation perspective in mind, KDP stock looks promising for the future.
Looking at the longer-term performance of KDP stock, it has remained relatively stagnant, moving slightly from levels of $30 in early January 2021 to around $30 currently. In comparison, the S&P 500 has seen an increase of about 35% over this period, highlighting the lackluster performance of KDP stock with respect to the index. The stock returns for KDP were 15% in 2021, -3% in 2022, and -7% in 2023, indicating underperformance compared to the S&P 500 during these years.
Investors have found it challenging to consistently beat the S&P 500 in recent years, even for heavyweights in the Consumer Staples sector and megacap stars. However, the Trefis High Quality Portfolio, consisting of 30 stocks, has outperformed the S&P 500 each year over the same period, providing better returns with less risk. As a group, HQ Portfolio stocks have shown more stable and consistent performance metrics compared to individual stocks.
Amid the current uncertain macroeconomic environment with high oil prices and elevated interest rates, there are concerns about whether KDP could face a situation similar to 2021 and 2023 and underperform the S&P 500. However, analysts predict a strong potential for KDP stock to see higher levels in the future. With inflation easing and an expected improvement in the demand environment, investors may benefit from investing in KDP stock at current levels for long-term gains.
Keurig Dr Pepper’s fundamentals have shown positive growth, with revenue increasing to $14.8 billion in 2023 and net income rising by 52% during the same year. While the operating margin decreased slightly, the company saw overall margins expand year-over-year. Despite an increase in total debt, Keurig Dr Pepper appears to have a sufficient cash cushion to meet its obligations through the ongoing inflation shock, as it garnered $1.3 billion in cash flows from operations in the last twelve months.
Overall, with the Federal Reserve’s efforts to tame inflation rates and potential rate cuts on the horizon, Keurig Dr Pepper stock has the potential for solid gains once fears of a recession are alleviated. While there are near-term concerns regarding the weak consumer spending environment due to higher inflation, these factors appear to be priced into the stock. As inflation eases and the demand environment improves, investors may find KDP stock to be a valuable investment for long-term growth.
