Keurig Dr Pepper (NYSE:DPS) has entered 2020 with the wind in its sails, and those sails are billowing more fully than management envisioned mid-2018, when Dr Pepper Snapple Group merged with coffee maker Keurig Green Mountain. The company's fourth-quarter 2019 earnings, released Thursday, revealed near mid-single-digit revenue growth, as well as prospects for the current year which exceed its long-term benchmarks. Let's dive into the earnings, noting that all comparative numbers refer to the prior-year quarter, on a pro forma basis (i.e., combining prior-year results for Dr Pepper Snapple Group and Keurig Green Mountain).

Keurig Dr Pepper: Headline numbers

Metric Q4 2019 Q4 2018 Change
Revenue $2.93 billion $2.81 billion 4.3%
Net income $406 million $263 million 54.4%
Diluted EPS $0.29 $0.19 52.6%

Data source: Keurig Dr Pepper. EPS = Earnings per share.

What happened with Keurig Dr Pepper this quarter?

Close-up of glass soda bottles in various flavors.

Image source: Getty Images.

  • Net sales were mostly boosted by 5.3 percentage points of volume growth and product mix, partially offset by lower price realization. Organic sales expanded by 4.6% during the quarter.
  • Coffee systems sales improved by 4% to $1.21 billion, propelled by higher volume as a result of more than 10% growth in sales of coffee pods.
  • Packaged beverage sales rose by 2.9% -- also to $1.21 billion -- from momentum in the Evian, Core, Sunkist, Bai, Dr Pepper, and Canada Dry brands. Sales growth was marginally hampered by the company's exit from the BodyArmor brand in the fourth quarter.
  • Beverage concentrate sales turned in another high-growth scorecard, advancing revenue by 8% to $380 million. The segment notched 4.2 percentage points of growth from volume and mix, and 3.8 percentage points from firmer pricing power.
  • In the organization's smallest segment, Latin American beverages, sales rose 11% to $133 million.
  • Gross margin jumped 280 basis points to 57.7%; this improvement was responsible for most of the net earnings improvement in Q4 2019 against the prior-year quarter.

Guidance for 2020

Keurig Dr Pepper released its typically streamlined annual outlook alongside earnings on Thursday. Management advised investors to expect revenue growth of 3% to 4%, compared to the annual projected rate of 2% to 3% divulged at the time of the merger.

"This momentum is expected to be fueled by investments KDP is planning across the business, including in the areas of innovation, new partnerships, in-store execution, marketing and research and development," the company said in its earnings release.  

Keurig Dr Pepper anticipates full-year 2020 diluted earnings per share of $1.38 to $1.40, which translates into growth of between 13% and 15%. Underlying this target is the expectation that the company will achieve a projected $200 million in merger cost synergies in 2020.

Is KDP stock poised to catch up this year?

Going on 20 months following the July 2018 merger of two giant coffee and beverage concerns, Keurig Dr Pepper is meeting, and in some places exceeding, its earnings, revenue, and synergy targets. The consumer staples manufacturer and distributor also appears to be outperforming in product volume growth on both sides of the business. 

Yet, despite its solid execution and ample free cash flow, which supports a handsome dividend yielding 2% annually, the company has lagged the market: Shares rose just 13% in 2019 against the S&P 500 index's return of 29%. As a result, Keurig Dr Pepper's forward price-to-earnings ratio of 20 trails rivals like PepsiCoCoca-Cola, and Monster Beverage, which sport forward P/E ratios of 23, 25, and 28, respectively. 

For patient, income-oriented investors, these shares look attractive relative to peers and the broader market in general. As of this writing, the S&P 500 index has lost 6% of its value year-to-date as spiking fears of COVID-19's effect on corporate earnings takes a toll on market leaders. In contrast, Keurig Dr Pepper's stock has slipped just 2% over the same period. In turbulent times, quality dividend stocks have every opportunity to outperform.