KDP Keurig Dr Pepper
Solid soda franchise carrying a leveraged coffee bet; the value depends on executing the separation.
The story
Keurig Dr Pepper is a scaled North American beverage franchise: the Dr Pepper/Canada Dry brands, DSD distribution and Keurig's installed brewer base. It has now added JDE Peet's to build a global coffee business, with plans to split later into a beverage company and a coffee company. The soft-drink side is a mature, cash-generative moat with pricing power. The coffee side is lower-margin, commodity-exposed and growing slowly. Overall this is a mature company whose value rests on integration and separation, not growth.
TTM revenue jumped from 16.6B to 20.1B and margin fell to 15% because lower-margin JDE Peet's coffee is now consolidated and deal costs are included. So I cut the target margin from 19.5% to 18% for the blended mix, and nudged Y1 growth up to 7% for the partial-year annualization. The reported 0.48 sales-to-capital is inflated by acquisition goodwill, so incremental reinvestment stays at 1.2. Beta rises to 0.8 because net debt of about 13.4B, now roughly a third of market cap, adds leverage.
Value drivers
| Revenue growth (Y1) | 7.0% |
| Terminal growth | 2.5% |
| Forecast horizon | 7y |
| Target operating margin | 18.0% |
| Years to target margin | 4 |
| Sales-to-capital | 1.20 |
| Beta | 0.80 |
| Failure probability | 2.0% |
| Cost of capital (WACC) | 8.3% |
| Terminal WACC | 9.0% |
Valuation bridge
| PV of explicit FCFF | 12.10B |
| PV of terminal value | 25.18B |
| Equity value | 23.41B |
| ÷ shares → per share | $17.21 |
Projected free cash flow to the firm
| Yr | Revenue | Growth | Margin | NOPAT | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | 21.50B | 7.0% | 15.8% | 2.62B | 1.17B | 1.45B | 1.34B |
| 2 | 22.84B | 6.2% | 16.5% | 2.92B | 1.12B | 1.80B | 1.53B |
| 3 | 24.10B | 5.5% | 17.3% | 3.22B | 1.05B | 2.17B | 1.71B |
| 4 | 25.24B | 4.8% | 18.0% | 3.52B | 953.80M | 2.56B | 1.86B |
| 5 | 26.25B | 4.0% | 18.0% | 3.66B | 841.35M | 2.81B | 1.89B |
| 6 | 27.10B | 3.2% | 18.0% | 3.77B | 710.94M | 3.06B | 1.90B |
| 7 | 27.78B | 2.5% | 18.0% | 3.87B | 564.65M | 3.30B | 1.89B |
Key risks
- JDE Peet's integration and coffee separation execution, with dis-synergies and stranded costs
- Green coffee price inflation squeezing coffee margins
- Elevated leverage limiting buybacks and flexibility in a 5%+ rate environment
Catalysts
- Completion of the split into a beverage company and a global coffee company, unlocking a sum-of-the-parts rerating
- Deleveraging plus delivery of announced cost synergies