Keurig Dr Pepper

Keurig Dr Pepper's second-quarter constant-currency organic sales grew 7% on a 10% rise in US refreshment beverages that offset a US coffee decline of 3%. Plans to separate beverages and coffee into pure-play companies in early 2027 remain on track.

Why it matters: Much of our focus remains on the pending split. While we think the rationale is sound, we see significant execution risk, as the timeline between the JDE Peet's acquisition and separation is less than one year. The ongoing search for a CEO of the coffee company adds further complications. Rafael Oliveira, the former CEO of JDE Peet's, left Keurig Dr Pepper less than three months after it announced that he would lead the coffee company. Management stated a CEO would be in place well before the separation, but we still see increased execution risks. The legacy businesses largely performed as expected. US refreshment beverages grew volumes 6.5% and prices by 3.5%, while US coffee was pressured by elevated green coffee costs and category headwinds. However, these challenges weren't too surprising to us.

The bottom line: We don't expect a major change to our $33 fair value estimate for narrow-moat Keurig Dr Pepper. Shares have risen 7% over the past three months, putting them in fairly valued territory. We see attractive risk-adjusted upside in wide-moat PepsiCo. Currently trading 18% below our $169 fair value estimate, we think the market overweights current headwinds in its food business and underappreciates its unwavering focus on innovation and affordability. Management reaffirmed 2026 guidance for net sales of $25.9 billion-$26.4 billion and constant-currency adjusted diluted EPS growth in the low-double-digit range. Our forecast of $26.1 billion and 12% fall within this range, respectively.

After reviewing second-quarter earnings, we maintained our fair value estimate for Keurig Dr Pepper of $33 per share. Our intrinsic valuation implies a 12 times multiple against our adjusted 2027 earnings estimate and 12 times on an enterprise value/adjusted EBITDA basis.

Keurig Dr Pepper's second-quarter constant-currency organic sales grew 7% on a 10% rise in US refreshment beverages that offset a US coffee decline of 3%. Plans to separate beverages and coffee into pure-play companies in early 2027 remain on track.

For 2026, after incorporating nine months of contribution from JDE Peet's, we forecast sales to rise 8% to $26.3 billion, but model operating margins to fall to 18.1% from 22% in 2025, given JDE Peet's lower margins and integration-related costs. For 2027, we model sales to rise 15% to $30.2 billion and operating margins falling to 17.7% as we incorporate a full year of impact from JDE Peet's. From 2028 onward, we expect results to normalize and more closely mirror underlying business trends. We forecast company organic sales to rise 4% annually, on 5% growth in North America refreshment beverages, on 2% price increases, and 3% volume expansion, and 3% growth in global coffee on a blend of volume mix (1%) and price hikes (2%).

On operating margins, we use the 17.7% level in 2027 as the benchmark and model the metric to widen 60 basis points over the following years to 18.3% by 2035. We model the profitability lift to come entirely on the gross margin line, as the metric rises 130 basis points to reach 47.9% in 2035, driven by procurement cost savings in coffee given the firm's larger scale, and by a favorable sales mix in beverages as innovation pushes up prices and drives volume via diversification strategies in categories and channels. However, partially offsetting these gains, we model selling and labor expenses as a percent of sales to rise to 24.5% by 2035, from 23.8% in 2027, as we anticipate labor policies in Europe to limit the scope of efficiency gains via job cuts in coffee while the refreshment beverage business ramps up investments in its sales team to support a growing list of brands. On marketing expenses, we don't expect the firm to skimp on spending given the importance of brand intangibles for long-term growth and investment returns, and model such spending to remain stable at roughly 5.1% of sales between 2027 and 2035.

We believe Keurig Dr Pepper has amassed a narrow economic moat based. While significant goodwill (34% of total assets versus 20% at wide-moats Coca-Cola and PepsiCo) following its 2018 and 2026 mergers has raised the bar for earning economic profits, we expect steady revenue growth and operational efficiency gains to help the firm deliver an average return on invested capital above our estimated 7% weighted average cost of capital over the next decade. We don’t expect such excess returns can stretch over a 20-year horizon, given secular headwinds in its US-focused refreshment beverage arm and competitive pressure facing the coffee business.

In its beverages business, its collection of well-known flavored carbonated soft drink brands (including Dr Pepper, Canada Dry, 7UP, and A&W) has enabled it to enjoy strong pricing power and close relationships with top retailers and food-service providers, therefore securing a solid number-three position in the CSD category in the US with a 17% volume share, trailing only Coke (35%) and PepsiCo (23%) in 2025, per Euromonitor. Its CSD revenue (90% of beverage sales) is generated entirely from non-cola CSD subcategories (collectively accounting for half of total CSD volume) such as pepper, orange, ginger ale, and root beer (where it dominates). This has allowed the firm to avert a collision with the most iconic brands at Coke and Pepsi, with its differentiated products driving brand affinity and boosting its appeal to retailers and food-service chains. The popularity of its Dr Pepper drink is exemplified by a 100% penetration at the foundations of the top 10 fast-food chains in the US (per Beverage Digest), whereas CSD giant Coke only has 70% penetration for its cola and lemon-lime CSDs. Similarly, consumer demand for Keurig’s top non-cola CSD brands have given the firm leverage in negotiating with retailers for shelf space. The beverage brand prowess of Keurig Dr Pepper, in turn, has enabled the company to raise beverage prices by high single digits on average in recent years while keeping volumes growing at low-single-digit rates, outpacing the overall CSD category volume growth. We think the strength in its refreshment beverage business not only benefits from flavor innovation and digital engagement among younger consumers, but also its diversification strategy that is fueling growth in non-soda categories, including energy and sports drinks and premium water.

On the other hand, the intangible moat source in Keurig Dr Pepper’s coffee business is evidenced not by pricing power, but by its entrenched relationships with major retailers and brand partners, as it boasts an installed base of close to 40 million households. An early-mover advantage and solid execution have earned Keurig Dr Pepper a number-one position in single-serve coffee brewers in the US and Canada, with an estimated market share north of 75%. Meanwhile, a full assortment of Keurig-compatible pods from most of the top-selling coffee brands, including Starbucks, Peet’s, Dunkin’, and Folgers, made possible through Keurig’s flexible licensing and/or manufacturing partnership agreements with the brand owners, gives Keurig Dr Pepper an 80% pod volume share in North America. Deploying a razor/blade model aimed at driving household penetration of brewers and subsequently pod orders, Keurig Dr Pepper positions itself as an important partner for retailers looking to ride healthy growth trends (mid-single-digit rates forecast by Euromonitor, driven by convenience and better coffee taste/aroma relative to standard ground coffee, which strikes us as reasonable) in the $9 billion single-serve coffee pod market. This has created considerable hurdles for new single-serve brewer entrants.

Cost advantages based on sourcing, manufacturing, and distribution scale add the second pillar to our moat rating. Its $30 billion pro forma revenue base is smaller relative to Coke’s $48 billion and Pepsi’s $94 billion but still gives it considerable negotiating leverage to lower sourcing costs for advertising services and for raw materials including plastic, aluminum, coffee, and other agricultural ingredients. Full supply chain control, with a network of over 100 tech-enabled manufacturing plants and distribution centers, create dynamic store delivery scheduling and warehousing capabilities. This allows Keurig Dr Pepper to accelerate commercialization at a faster clip and lower costs compared with similar-size peers, expanding shelf space with over 250 major retailers in North America. In addition, the firm has been able to attract top coffee brands such as Folgers (owned by no-moat J.M. Smucker) and Starbucks, as well as beverage brands (Evian, Peet’s ready-to-drink tea, and Vita Coco, to name a few) onto its manufacturing and distribution platform, further adding to its scale. We believe the benefits can accrue to Keurig Dr Pepper’s bottom line in the beverage business given its pricing power, but we expect such benefits in the coffee business to be passed on to brand partners, which are in a stronger position to negotiate for more favorable terms in, given the importance of the brands’ volume and the availability of competing manufacturers.

Competition from Nespresso (the single-serve coffee unit of wide-moat Nestlé), reusable pods, and disruptive new coffee brewing technology could weaken Keurig’s ecosystem in the single-serve coffee market. When combined with our expectation that CSD volume will normalize to low single digits over the longer term as health-conscious consumers in North America shift away from sugary drinks, we lack confidence that Keurig Dr Pepper can outearn its cost of capital over a 20-year horizon.

Keurig remains the number-one single-serve brewer maker in North America, with strong retail relationships and a large installed base.

The company’s effort to bring more third-party hot beverage (coffee, tea, and cocoa) and ready-to-drink beverage brands onto its manufacturing and distribution platform bodes well for scale efficiency and distribution clout.

The separation of the beverages and coffee businesses should create streamlined powerhouses in each respective category.

Secular headwinds in carbonated soft drink demand in the US are a challenge to Keurig Dr Pepper’s long-term growth outlook.

Sales concentration in North America could expose Keurig Dr Pepper to macro headwinds unique to the region and preclude the firm from tapping structural growth opportunities in emerging markets due to a lack of distribution rights.

The complexity of the JDE Peet's acquisition and the subsequent break-up may distract management have distracted management from running the business.