KDP is the product of a merger of Dr Pepper Snapple Group, Inc. (DPS) and Keurig Green Mountain, Inc. (KGM) on July 9, 2018. A Monday, January 29, 2018 presentation on the company web site has a distilled version of this story. Since the merger appears to be the most singular defining characteristic of KDP, I'm going to drill down on the presentation here. Slide 7 shows the brands both sides contributed. The most famous include 7-Up, Dr. Pepper, Canada Dry, Keurig, Snapple, A&W, SunKist, and Hawaiian Punch, et al.
The most overriding flavor of the company, however, is private equity. KGM was privately held prior to the merger, and the rationale for the merger is nearly completely in service to that flavor. There are some gaffes here; slide 11 of the merger presentation book lays out how incompetent the former Keurig and Green Mountain management was, and how the new private equity management is so much better. Slides 8 and 9 present a heavily theoretical view of the beverage industry, and how consumers are changing. It my experience, there may be fads and trends that affect things, but people don't change much or very quickly, so this thesis seems wrong at its birth.
Slide 20 has more consumer theory. Slide 18 tries to sing the praises of DPS's consistency, but the charts are less convincing than numeric tables would have been. Perhaps since it was DPS's cash generation that KGM sought (in order to service the LT debt needed for the buyout) there was no need to dwell on this topic too closely, since it would be DPS shareholders who would be giving up those consistent operational gains.
The best slide here is #21, with an overview of the beverage industry. Though it omits some important details, it's an excellent presentation. One data item portrayed here that seems alarming: The energy drink industry, even in 2018, is nearing the size of the cola market. If this is true, then energy drinks may be near the apex of their growth (a whoops for MNST, and for PEP's Rockstar (yuck) line).
Financial History
Data is from Macro Trends. Amounts are in millions of U.S. dollars. Shares are in millions.
Because of the, the data is disjoint. Data for 2018, 2019, and 2020 is for the combined company. Data for the 2005 through the first (!) 2017 entry appears to be for Dr. Pepper Snapple on its own. The 2014-2016 numbers match what DPS reported on its press releases for full fiscal year results. All numbers are taken verbatim from Macro Trends, including data absences for early years. Numbers for the transition year 2017 are left as-is from the Macro Trend data, and should not be relied upon for establishing trends based on ratios for year to year changes.
| Year | Revenue | Oper Income | oper margin | Net Income | net margin |
| 2020 | $11,618 | $2,480 | 21% | $1,325 | 11.4% |
| 2019 | $11,120 | $2,378 | 21% | $1,254 | 11.3% |
| 2018 | $7,442 | $1,237 | 17% | $586 | 7.9% |
| 2017 | $6,690 | $1,388 | 21% | $1,076 | 16.1% |
| 2017 | $4,269 | $897 | 21% | $378 | 8.9% |
| 2016 | $6,440 | $1,433 | 22% | $847 | 13.2% |
| 2015 | $6,282 | $1,298 | 21% | $764 | 12.2% |
| 2014 | $6,121 | $1,180 | 19% | $703 | 11.5% |
| 2013 | $5,997 | $1,046 | 17% | $624 | 10.4% |
| 2012 | $5,995 | $1,092 | 18% | $629 | 10.5% |
| 2011 | $5,903 | $1,024 | 17% | $606 | 10.3% |
| 2010 | $5,636 | $1,025 | 18% | $528 | 9.4% |
| 2009 | $5,531 | $1,085 | 20% | $555 | 10.0% |
| 2008 | $5,710 | -$168 | -3% | -$312 | -5.5% |
| 2007 | $5,695 | $1,004 | 18% | $497 | 8.7% |
| 2006 | $4,700 | $1,018 | 22% | $510 | 10.9% |
| 2005 | $3,205 | $3,205 | | $477 |
Operating margin and net margin are good generally, fair for a large beverage company. If there were fewer brands, this might be an area for future improvement. If the company had more "hot" brands, it might help. Only Keurig has potential here, and it could have to lift a lot of other brands up to make an impact on operating margins.
| Year | Shares | EPS | Share Holder Equity | ROE | share shrink age |
| 2020 | 1,422 | $0.93 | $23,830 | 5.6% | -0.21% |
| 2019 | 1,419 | $0.88 | $23,257 | 5.4% | |
| 2018 | 1,098 | $0.53 | $22,533 | 2.6% | |
| 2017 | 183 | $5.89 | $7,398 | 14.5% | |
| 2017 | 791 | $0.47 | | | |
| 2016 | 187 | $4.54 | $2,134 | 39.7% | 2.60% |
| 2015 | 192 | $3.97 | $2,183 | 35.0% | 2.54% |
| 2014 | 197 | $3.56 | $2,294 | 30.6% | 3.90% |
| 2013 | 205 | $3.05 | $2,277 | 27.4% | 3.30% |
| 2012 | 212 | $2.96 | $2,280 | 27.6% | 4.07% |
| 2011 | 221 | $2.74 | $2,263 | 26.8% | 9.05% |
| 2010 | 243 | $2.17 | $2,459 | 21.5% | 4.71% |
| 2009 | 255 | $2.17 | $3,187 | 17.4% | -0.39% |
| 2008 | 254 | -$1.23 | $2,607 | -12.0% | 0.00% |
| 2007 | 254 | $1.96 | $5,021 | 9.9% | 0.00% |
| 2006 | 254 | $2.01 | | | |
| 2005 | 254 | $1.88 | | |
One interesting fact is that DPS was buying back more than 2% of its shares annually prior to the merger. Faced with a mature soda market, it was shoveling money at shrinking its share base, and had reduced outstanding shares from 254 million to 187 million, a 26.4% reduction, in only 10 years. Obviously, under new management and higher obligations to those owners, it has ceased buying back shares.
Return on equity, formerly excellent, appears to be low, but that is only because of $20.172 billion of GAAP goodwill on the asset side of the ledger. Without that phantom asset, ROE is effectively as good as it was before.
Valuation
I analyzed four scenarios, and varied two with alternative discount rates.
| scenario | base EPS | growth rate | growth dura. | growth rate from peak | dura. of post peak | disc rate | share value |
| pessimistic | $0.93 | 4% | 12 | -7% | 10 | 5% | $15 |
| optimistic | $0.96 | 10% | 15 | -3% | 15 | 5% | $38 |
| nominal | $0.94 | 6% | 14 | -3% | 13 | 5% | $22 |
| consensus | $0.94 | 6% | 14 | -5% | 13 | 5% | $22 |
| optim, mal | $0.96 | 8% | 15 | -4% | 15 | 3% | $39 |
| nomin, mal | $0.94 | 4% | 14 | -3% | 13 | 3% | $24 |
KDP is trading above all but the optimistic valuations, which are only a few dollars above the current market price. Note that I am using GAAP EPS, which I believe to be correct in this case. Company presentations of quarterly earnings other than 10Qs may report various adjustments to net income and a higher EPS, but these alternate presentations are not strictly GAAP, if my information is correct.
Management Indicators
Slide 26 of the aforementioned merger presentation makes clear the most salient fact about KDP: This company is owned by private equity. At the bottom it says "JAB and its partners will together make an equity investment of $9 billion as part of the financing of the transaction; Upon closing of the transaction, JAB and its partners will own 87% of the combined company." From the blizzard of recent ownership statements on SEC filing forms 3, 4, and 5, this appears to be lower than was the case at that moment, but JAB (Maple) still owns a substantial number of shares.
Having more brands does not make it a better business. In fact, it's worse. Managers are spread too thin, trying to find tricks for too many small brands of minor importance or interest. Coffee and soda pop may both be beverages, but they are not alike. The combination makes me think of Peter Lynch's "deworsification" theory of mergers and acquisitions.
The merger was perhaps facilitated by the reduced number of DPS shares, its high-name-recognition brands (Dr. Pepper, 7-Up), and the willingness to pay large amounts of cash because the spreadsheets said that the cost of the capital was less than its return, slightly. DPS generated cash, and was using it in a low-return manner. KGM could use the cash generation to fund low-priced debt. The merger was an arranged marriage of finance, not a product-based merger.
Long term, the synergies will be lacking, and eventually there could be pressure to separate the brands again. KO and PEP will not buy Dr. Pepper or 7-Up, however, unless it were a fire sale.
Data Sources
Only two annual reports (2018 and 2019) are available. The older reports for the predecessor companies are not immediately accessible. They are available at company's investor relations pages.
