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Why Did Keurig Dr Pepper Inc. Shares Rise by 13% in October?

By Daniel B. Kline – Updated Nov 9, 2018 at 11:58AM

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The company has made it clear that it's on the right track.

Keurig Dr Pepper (DPS) closed October having yet to report a full quarter of earnings since the coffee brand was taken over by the soft-drink company. That left investors somewhat unsure of what to expect when the new entity reported in November. The company eased any concerns in October, though, when it reaffirmed its 2018 guidance.

What happened

The company issued a brief press release that "reaffirmed its outlook for 2018 adjusted diluted EPS of $1.02 to $1.07, on a pro forma basis, after the impact of preliminary Purchase Price Accounting adjustments." That's a lot of words to say that the new company expects its results to be in line with earlier forecasts. That allowed investors to let out a sigh of relief and offered proof that the company's pre-merger projections were correct.

This small piece of news was viewed warmly by investors. After closing at $23.02, shares in the company rose to $26 at the end of October, a nearly 13% gain, according to data provided by S&P Global Market Intelligence

People clink soda glasses.

Keurig Dr. Pepper had a solid third quarter. Image source: Getty Images.

So what?

Keurig and Dr Pepper completed their merger during the second quarter. That meant the Q2 earnings numbers were still a mix of the two companies operating separately. In that earnings release, CEO Bob Gamgort more or less said that getting a clear picture would take time.

"With the merger of these two great companies now behind us, our focus is on integration, optimization and ensuring delivery of the financial expectations we established," he said. "The integration, in particular, is well on track, as evidenced by the establishment of the new KDP leadership team, and we remain very confident in our promised synergies and the future of our new company." 

Now what

The company had a strong third quarter. Combined sales were up 140% to $2.7 billion (largely due to the merger), and operating income rose 45% to $344 million. Earnings per share dropped from $0.14 to $0.11 versus the same period a year ago, but Gamgort was very happy with the results.

"Our new organization is working well and delivered a strong quarter, with both top- and bottom-line growth and market share strength across our major categories," he said. "We also repaid approximately $550 million of debt since the merger close. We remain confident in our outlook for 2018 and the long-term value creation framework we shared at the time of the announcement of the merger."

The strong results were rewarded by investors. Shares climbed further than their October gains, closing at $28.47 on Nov. 8, one day after the company reported.

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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