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Three Reasons Why KDP is Risky and One Stock to Buy Instead

By: StockStory

January 08, 2025 at 04:06 AM EST

KDP Cover Image

Keurig Dr Pepper currently trades at $30.68 per share and has shown little upside over the past six months, posting a small loss of 5%. The stock also fell short of the S&P 500’s 6.3% gain during that period.

Is there a buying opportunity in Keurig Dr Pepper, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

We're swiping left on Keurig Dr Pepper for now. Here are three reasons why KDP doesn't excite us and a stock we'd rather own.

Why Is Keurig Dr Pepper Not Exciting?

Born out of a 2018 merger between Keurig Green Mountain and Dr Pepper Snapple, Keurig Dr Pepper (NASDAQ: KDP) is a consumer staples powerhouse boasting a portfolio of beverages including sodas, coffees, and juices.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Keurig Dr Pepper’s 6.9% annualized revenue growth over the last three years was mediocre. This was below our standard for the consumer staples sector. Keurig Dr Pepper Quarterly Revenue

2. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Keurig Dr Pepper’s margin dropped by 2.2 percentage points over the last year. If its declines continue, it could signal higher capital intensity. Keurig Dr Pepper’s free cash flow margin for the trailing 12 months was 7.4%.

Keurig Dr Pepper Trailing 12-Month Free Cash Flow Margin

3. Previous Growth Initiatives Haven’t Paid Off Yet

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Keurig Dr Pepper historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.9%, somewhat low compared to the best consumer staples companies that consistently pump out 20%+.

Keurig Dr Pepper Trailing 12-Month Return On Invested Capital

Final Judgment

Keurig Dr Pepper’s business quality ultimately falls short of our standards. With its shares lagging the market recently, the stock trades at 15.1× forward price-to-earnings (or $30.68 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. Let us point you toward Wingstop, a fast-growing restaurant franchise with an A+ ranch dressing sauce.

Stocks We Would Buy Instead of Keurig Dr Pepper

The Trump trade may have passed, but rates are still dropping and inflation is still cooling. Opportunities are ripe for those ready to act - and we’re here to help you pick them.

Get started by checking out our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,691% between September 2019 and September 2024) as well as under-the-radar businesses like United Rentals (+550% five-year return). Find your next big winner with StockStory today for free.

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