Citi Upgrades Keurig Dr Pepper to Buy Due to Improvement in U.S. Coffee Volume

Citi analysts have upgraded Keurig Dr Pepper from Neutral to Buy, citing improvements in U.S. coffee volumes and the potential for further revenue growth. According to their analysis, U.S. coffee, which comprises about 26% of Keurig Dr Pepper’s sales and significantly influences its valuation, is expected to recover in the latter half of 2024.

This anticipated rebound is attributed to easier year-over-year comparisons, improved scanner data, contributions from new brands, and the promising impact of the recently introduced K Brew + Chill product line. Citi noted that in the second quarter of 2024, coffee pod volumes remained stable, achieving a slight increase of 0.2%, a significant improvement compared to a decline of 4.5% in the previous five quarters. The analysts predict further growth in the second half of the year with low-single-digit increases.

The coffee segment had experienced challenges, including the normalization of at-home consumption post-COVID and reduced consumer spending. However, Citi also expects that the U.S. Refreshment Beverages segment, which represents 60% of Keurig Dr Pepper’s sales, will gain momentum in the latter half of the year. Recent scanner data analysis indicates progress, especially from the company’s partner brands, with growth projected to reach around 5%, up from 4% in the first half.

Despite the stock’s 12% increase following a better-than-expected second-quarter earnings report, Citi views Keurig Dr Pepper’s valuation as appealing. The stock is currently trading at about 18.3 times projected 2025 earnings, a 17% discount compared to competitors Coca-Cola and PepsiCo, which typically have a historical discount of only 10%.

Citi has raised its price target for Keurig Dr Pepper from $36 to $43, reflecting the company’s improving outlook, strong performance in its core segments, and the potential benefits from its new coffee and beverage initiatives.