Can Keurig Dr Pepper (KDP) Deliver Earnings Beat In Q3?

Keurig Dr Pepper Inc. (NYSE:KDP) , the newly formed company after the merger of Dr Pepper Snapple Group Inc and Keurig Green Mountain, is slated to report its third-quarter 2018 results on Nov 7, 2018. This will be the first quarterly results of the combined company, which merged on Jul 9. The merged company is the seventh-largest company in the U.S. food and beverage sector, and the third-largest beverage company in North America.

Factors at Play

Keurig Dr Pepper is poised to gain from DPS’ distribution strategy and solid innovation alongside Keurig's coffee brands and online presence. It has an edge over competitors, providing hot and cold beverages that satisfy the needs of consumers, anytime and anywhere, at home or on-the-go, at work or at play. It has a portfolio of more than 125 owned, licensed, partner and allied brands, with leadership in numerous beverage categories.

Keurig Dr Pepper is on track with the integration of the combined company. During second-quarter results, it reiterated the combined company outlook for 2018 and the longer term, which it provided on Mar 20, 2018, on its Investor Day. For 2018, it anticipates adjusted earnings per share of $1.02-$1.07, after the impact of preliminary Purchase Price Accounting adjustments. Further, the company expects sales to grow 1-2% in 2018.

For the long term, the company expects to generate deal synergies of nearly $600 million between 2019 and 2021, with about $200 million savings anticipated every year. These synergies, combined with strong margin expansion at Keurig Green Mountain and growth at historic levels for DPS, are likely to result in the combined company EPS growth rate of 15-17% between now and 2021. Additionally, Keurig Dr Pepper expects a significant cash flow generation and rapid deleveraging, targeting a leverage ratio of less than 3.0 in two to three years.

Consequently, the company’s shares rallied 10.4% in the last three months against the industry’s decline of 8.8%.

However, we believe that the CSD category headwinds will continue to impact the company’s volumes, including the diet versions, due to Dr Pepper’s strong portfolio of carbonated beverages. Cross-category competition, and growing health and wellness consciousness among consumers are hurting CSD category growth. Moreover, new taxes on sugar-sweetened beverages and growing regulatory pressures are affecting CSD sales. These general constraints in the soft drinks business are likely to continue impacting the newly formed company.

Further, higher aluminum prices due to the ongoing trade-war are likely to increase the cost of producing cans. This, along with escalating freight costs, should result in increased prices for sodas, which may hurt profitability.

What the Zacks Model Says

Our proven model does not show that Keurig Dr Pepper is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Keurig Dr Pepper’s Earnings ESP of 0.00% and Zacks Rank #5 (Strong Sell) make surprise prediction inconclusive.

Stocks Poised to Beat Earnings Estimates

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to deliver an earnings beat:

Turning Point Brands, Inc. (NYSE:TPB) has an Earnings ESP of +8.74% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Nu Skin Enterprises, Inc. (NYSE:NUS) has an Earnings ESP of +0.21% and a Zacks Rank of 3.

Monster Beverage Corporation (NASDAQ:MNST) has an Earnings ESP of +3.01% and a Zacks Rank #3.

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