BMO Says The Valuation Discount In Keurig Dr Pepper Is 'Too Large To Ignore'

Shares of Keurig Dr Pepper Inc (NYSE: KDP) are trading at a valuation gap versus its peers that's not only "too large to ignore" but should narrow, according to BMO Capital Markets.

The Analyst

BMO's Amit Sharma upgraded Keurig Dr Pepper from Market Perform to Outperform with a price target lifted from $27 to $34.

The Thesis

Dr Pepper Snapple's stock is trading at a next 12 months P/E multiple of 22 times, which represents a 200-basis point discount versus some of its global beverage peer rivals trading at around 23.9 times, Sharma wrote in the note. Not only has Keurig Dr Pepper's stock underperformed its peers by nearly 760 basis points in the past month, the discount spread expanded on no notable development.

Sharma said there are three reasons to support the case for Keurig Dr Pepper's stock multiple to expand.

1. About half of Keurig Dr Pepper's 15% to 17% EPS CAGR will come from $600 million in deal synergies which management is likely to deliver on. As such, the likelihood of the company reporting an earnings disappointment in the coming few years is "little, if any."
2. Beyond 2021, the company should be able to show a high-single-digit EPS growth as K-cup single-serve pod price discounting will moderate after hitting an "optimal" level in 2020. A large and highly efficient pod manufacturing facility will come online in 2021 and create incremental benefits.
3. Management should be able to succeed in lowering its balance sheet leverage to less than three times by 2021. This will free up around $2 billion in cash for special dividends, stock buybacks, or new accretive acquisitions.

Price Action

Shares of Keurig Dr Pepper were trading higher by 4.5% at $29.90 at time of publication.

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