Keurig Dr Pepper (KDP) has surprised investors with higher than expected growth in Q3, delivering a four-point beat of 10.7% revenue growth.
Driven by 14.4% growth in its US beverage business, KDP swelled revenues to $4.3bn in the quarter, around $150m ahead of market expectations.
The company’s US coffee business likewise defied expectations of a 0.2% contraction to post 1.5% growth, as volumes fell less than anticipated.
Operating profit rose to $995m in the quarter, up from $902m. KDP has raised $12.1bn in revenue so far this year, 7.1% ahead of the same period in the prior year.
KDP CEO Tim Cofer said the board was “pleased” with the strong delivery as KDP prepares to buy Dutch coffee behemoth JDE Peet’s and then split into two fmcg giants: one for beverages, the other coffee.
“Strong innovation and in-market execution drove market share gains across key categories, with sales momentum, along with disciplined actions to offset inflationary pressures, contributing to solid earnings and free cashflow growth,” he said.
“We are focused on sustaining our base business strength while also thoughtfully preparing for the transformation ahead as we first acquire and integrate JDE Peet’s and subsequently separate into two, advantaged pureplay companies.”
Alongside its results, KDP announced it had raised $7bn in funding from Apollo and KKR to finance the acquisition of JDE Peet’s, with $4bn of the total dedicated to a new ‘K-Cup’ coffee pod manufacturing joint venture.
“Keurig Dr Pepper’s separation plan represents a pivotal moment for the company, and we are proud to support this next phase,” said Apollo partners Jamshid Ehsani and Matt Nord.
The company also revealed it had launched a search for a future CEO for the post-split coffee company, after the previously-announced CEO Sudhanshu Priyadarshi pulled out to stay with KDP as CFO.
The stock market reacted positively to KDP’s strong results and new funding, with shares jumping 6.5% in the day to $29.10. KDP’s stock has climbed steadily since its five-year low of $25.30 in October, which followed investor backlash to management’s surprise plan to split up KDP’s beverage and coffee businesses.
“The transaction was not what investors were expecting,” said RBC co-head of global consumer and retail research Nik Modi.
“Many were subscribed to a story where a cheap stock was seeing strong growth from its packaged beverage business and a slowly recovering coffee business. While we understand that investors may be frustrated and leverage may be a near-term overhang, we believe the recent pressure on KDP’s stock has been overdone.
“Not only is the deal expected to be accretive in the first year after close, our DCF and sum-of-the-parts analysis both indicate fair value for the stock at around $42.”
He said KDP’s Q3 performance had proved the company’s “fundamentals remain healthy, while deal activity remains an overhang on the stock”.
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