In a comparison between Keurig Dr Pepper (KDP) and Coca-Cola (KO) stocks, KDP is believed to be a better pick due to its lower valuation and potential for outperforming KO in the next three years. KDP’s stock has seen gains of 15% over the past three years compared to a 20% increase for KO, with both underperforming the S&P 500. Despite this, the Trefis High Quality Portfolio has consistently outperformed the benchmark index, suggesting the potential for better returns with less risk.
KDP has seen lower revenue growth compared to Coca-Cola, with sales rising at an average annual rate of 8.5% from 2020 to 2023, while KO experienced a growth rate of 11.6% over the same period. KDP’s revenue growth was driven by at-home demand for K-Cups during the pandemic, while Coca-Cola saw growth in both at-home and away-from-home channels. However, KDP’s refreshment beverages business is currently performing better than its U.S. coffee segment.
In terms of profitability, Coca-Cola has a higher operating margin and better financial position compared to Keurig Dr Pepper. KO’s operating margin of 28.6% is better than KDP’s 22.6%, and it also has lower debt and higher cash reserves. Despite this, KDP is still seen as a better choice due to its more attractive valuation. KDP is estimated to have a valuation of $38 per share, reflecting over 15% upside from its current levels, while KO’s valuation is estimated to be $65 per share, with only a 3% upside.
Looking ahead, KDP may continue to face headwinds in U.S. coffee sales, while Coca-Cola could see tepid volume growth due to higher inflation impacting consumer spending. Despite these challenges, KDP is expected to fare better due to its lower valuation and potential for outperforming KO in the next three years. Investors are advised to consider these factors when deciding between the two beverage stocks, with KDP being the more favorable choice based on its better valuation.
