While its Dr Pepper soda brand has been taking market share, Keurig Dr Pepper(NASDAQ: KDP) stock nonetheless fell following its third-quarter results as weakness in its coffee segment continued. Meanwhile, the company announced a big acquisition in the energy drink space.
With the stock trading lower, let's take a closer look at its most recent results and acquisition to see if now is a good time to buy.
A tale of two segments
Keurig Dr Pepper's refreshment segment -- which includes Dr. Pepper, Snapple, Canada Dry, and Sunkist -- continued to perform well in Q3, with revenue jumping 5.3% year over year to $2.4 billion. The revenue was driven by a 4% increase in volume/mix, combined with a 1.3% rise in price.
This is the opposite dynamic from Coca-Cola, which in its most recent quarter saw price increases drive its sales while volumes slipped. Earlier this year, Dr Pepper overtook PepsiCo's Pepsi for the No. 2 soda market share spot in the U.S. by volume. Its use of popular limited-time offerings (LTOs) has been helping drive sales.
Meanwhile, the company's coffee segment saw revenue drop 3.6% year over year to $1 billion. Volume/mix grew 2.7%, but it saw unfavorable net price realizations of 6.3%. Operating income, meanwhile, fell 7.2% compared to Q3 2023.
K-pod shipments dropped 0.4%, but brewer shipments rose 3.3% to 10.5 million. The company noted that it was taking share, but the market remains very promotional. It expects pricing to improve next year. International segment revenue, meanwhile, edged 0.4% lower year over year to $525 million, but it was up 6.5% in constant currency. It saw a 3.4% jump in price and a 3.1% increase in volume/mix. Overall, revenue rose 2.3% to $3.9 billion, or 3.1% in constant currency. Adjusted diluted earnings per share (EPS) climbed 6.3% to $0.51.
Looking ahead, the company reaffirmed its full-year guidance for mid-single-digit sales growth and high single-digit adjusted EPS growth. That growth is also the company's long-term algorithm.
Image source: Getty Images.
A Halloween-themed acquisition
With Halloween right around the corner, Keurig Dr Pepper also announced it was buying the aptly named Ghost energy drink brand. The company will acquire a 60% stake in Ghost initially, with a plan to buy the rest in 2028. The initial 60% stake will cost $990 million, which is about a 3x revenue multiple on projected 2024 revenue. The remaining price will be done on a pre-negotiated valuation scale based on Ghost's 2027 financial performance.
Ghost has been growing quickly, with sales quadrupling over the past three years. It will join Keurig Dr Pepper's line-up of energy drinks, which also includes C4. Ghost is largely known for the bold flavors it has developed in partnership with other brands, such as Swedish Fish and Sour Patch Kids. C4, meanwhile, is more aimed toward the fitness crowd. The company also has an energy drink partnership with Black Rifle and a distribution agreement with Nutrabolt for Bloom RTD Energy.
The Ghost acquisition comes at a time when the energy drink category has slowed down, largely due to weak traffic at convenience stores. This is one of the main distribution outlets for the category, although the convenience store industry expects sales to pick up next year.
One of Keurig Dr Pepper's big opportunities with Ghost will be expanding its distribution. According to Morgan Stanley, the brand currently has an all commodity volume (ACV) of about 73%, which trails the energy leaders that are closer to 95%. ACV is a metric that shows how well a product is being distributed in each particular market. The calculation is weighted by a retailer's sales, so a store selling $100,000 worth of energy drinks a year would be much more heavily weighted than a store with only $2,000 in annual energy drink sales.
Is the stock a buy?
From a valuation standpoint, Keurig Dr Pepper is the cheapest among its soda peers, despite that part of its business arguably outperforming its rivals. It trades at a forward price-to-earnings (P/E) ratio of 16.5 times and a price/earnings-to-growth (PEG) ratio of 0.75. PEGs below 1 are usually considered undervalued, so on that basis, the stock looks attractive.
KDP PE Ratio (Forward 1y) data by YCharts.
While its coffee division is caught up in some industrywide weakness, its soda and other beverages have been performing well. Dr Pepper in particular has been resonating nicely with younger beverage drinkers. Meanwhile, the Ghost acquisition looks like a potentially good one. The segment has been in a slump, but the company will have the opportunity to help increase distribution while adding some marketing dollars behind the brand. I'd take advantage of the recent weakness in the stock and be a buyer.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
