Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Keurig Dr Pepper Inc (KDP, Financial). The stock, which is currently priced at 28.07, recorded a loss of 4.17% in a day and a 3-month decrease of 9.2%. The stock's fair valuation is $41.61, as indicated by its GF Value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- 1. Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- 2. GuruFocus adjustment factor based on the company's past returns and growth.
- 3. Future estimates of the business performance.
Keurig Dr Pepper: A Value Trap?
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Keurig Dr Pepper should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.37, and the company's revenues and earnings have been on a downward trend over the past five years, which raises a crucial question: Is Keurig Dr Pepper a hidden gem or a value trap? These indicators suggest that Keurig Dr Pepper, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding the Altman Z-Score
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Introduction to Keurig Dr Pepper Inc (KDP, Financial)
Keurig Dr Pepper was established in 2018 following a merger between Keurig Green Mountain Coffee and Dr Pepper Snapple. The company manufactures and distributes coffee systems (including coffee brewers and single-serve coffee pods) under the Keurig and Green Mountain brands, as well as ready-to-drink beverages including flavored (non-cola) sparkling soft drinks under well-known brands such as Dr Pepper, Snapple, and Canada Dry. The company controls production and route to market for its own brands through in-house manufacturing plants and distribution infrastructure and leverages these facilities to manufacture and distribute for third-party coffee and beverage brands via licensing and partnership agreements. U.S. and Canada make up 95% of revenues, with the rest from Mexico.
Keurig Dr Pepper's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Keurig Dr Pepper's Altman Z-score reveals Keurig Dr Pepper's financial health may be weak, suggesting possible financial distress:
The Bearish Signs: Declining Revenues and Earnings
One of the telltale indicators of a company's potential trouble is a sustained decline in revenues. In the case of Keurig Dr Pepper, both the revenue per share (evident from the last five years' TTM data: 2019: 7.73; 2020: 7.94; 2021: 8.55; 2022: 9.29; 2023: 10.26; ) and the 5-year revenue growth rate (-15.1%) have been on a consistent downward trajectory. This pattern may point to underlying challenges such as diminishing demand for Keurig Dr Pepper's products, or escalating competition in its market sector. Either scenario can pose serious risks to the company's future performance, warranting a thorough analysis by investors.
The Red Flag: Sluggish Earnings Growth
The company's earnings picture does not look much brighter. The 3-year EPS without NRI growth rate (4.7%) is sluggish, and the future 3 to 5-year EPS growth estimate (6.09%) does not show a promising uptick. These indicators could suggest the company is struggling to translate sales into profits effectively, a critical element of a successful business model.
Conclusion
Despite its low price-to-fair-value ratio, Keurig Dr Pepper's falling revenues and earnings cast a long shadow over its investment attractiveness. A low price relative to intrinsic value can indeed suggest an investment opportunity, but only if the company's fundamentals are sound or improving. In Keurig Dr Pepper's case, the declining revenues, EBITDA, and earnings growth suggest that the company's issues may be more than just cyclical fluctuations. Without a clear turnaround strategy, there's a risk that the company's performance could continue to deteriorate, leading to further price declines. In such a scenario, the low price-to-GF-Value ratio may be more indicative of a value trap than a value opportunity.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .Investors can find stocks with good revenue and earnings growth using GuruFocus' Peter Lynch Growth with Low Valuation Screener.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
