Keurig Dr Pepper: Misperceptions About Growth of Coffee Business

Eric DeLamarter and Brandon Carnovale of Half Moon Capital presented their investment thesis on Keurig Dr Pepper (US: KDP) at Wide-Moat Investing Summit 2023.

Thesis summary:

Keurig Dr Pepper is a stock that has come under pressure and fallen out of favor due to misperceptions regarding the growth trajectory of its coffee business and recent non-fundamental selling by legacy shareholder Mondalez (which has mostly exited its position).

Meanwhile, (1) KDP’s Dr Pepper brand is gaining market share, demonstrating stronger elasticity than Coke and Pepsi and growing at a double-digit rate; (2) its coffee business is inflecting favorably after a softer Q1, with K-Pod volume likely turning positive by July 2023 and the recent Cold Brewer release a significant opportunity; and (3) KDP’s coffee segment is underearning by ~500 bps, and Eric and Brandon believe consensus estimates are failing to capture the true earning power of the business.  KDP’s Bottling Group, last disclosed in 2008, remains a significant hidden asset as well.

KDP trades at a historically wide and unwarranted discount to peers Coke (US: KO) and Pepsi (US: PEP). A sum-of-the-parts analysis implies that the market is valuing KDP’s Keurig business at 6x EV/ EBIT, akin to a low-quality appliance manufacturer. Eric and Brandon believe there is upside to both revenue and margin expectations over the coming quarters.

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About the instructor:

Eric DeLamarter is the PM of Half Moon Capital— a research intensive, deep value-oriented, long/ short partnership which invests across various sectors and markets with a focus on small-mid cap companies and special situations. Prior to founding Half Moon, Eric was at Stelliam Investment Management, a value-oriented hedge fund in New York, an associate at Lineage Capital, LLC, a middle-market private equity fund and an investment banking analyst at RBC Capital Markets. Eric holds an MBA from The Heilbrunn Center for Graham & Dodd Investing at Columbia Business School, with a concentration in applied value investing and a BA from the University of Michigan.

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