Shares of coffee and carbonated beverage giant Keurig Dr Pepper (KDP 0.80%) popped on Thursday after the company reported soaring profits in its latest quarterly financial report. As of 2:40 p.m. ET, Keurig Dr Pepper stock was up 4% but it had been up almost 7% earlier in the day.
Profits are up more than sales
Keurig Dr Pepper mostly sells coffeemakers, coffee brewing supplies, and packaged beverages. In the first quarter of 2024, the company's net sales were only up by a modest 3% to $3.5 billion. However, it enjoyed substantial improvements to profits, which is what investors are cheering today.
Keurig Dr Pepper's gross margin expanded to nearly 56% compared with 52% in the prior-year period. Productivity improvements were partially credited for the increase. And on an adjusted basis, the company's Q1 operating income jumped 17.5% to $825 million.
For the year, Keurig Dr Pepper continues to anticipate modest top-line growth. But it hopes its adjusted profits will grow close to 10%. And this profit growth has the stock up today.
How is management using profits?
Keurig Dr Pepper's management credited itself with buying back more stock than ever during Q1 -- it used $1.1 billion during Q1 alone, which was a record. Management said it was being opportunistic with the stock's valuation. But that's only half the story.
The other half is that JAB Holding Company owns a lot of Keurig Dr Pepper stock. And in March, it announced it was divesting 100 million shares. Management, therefore, was buying up these shares to prevent downward pressure on the stock.
Granted, Keurig Dr Pepper did get a good deal on these shares at under $30 per share. But JAB has more to sell. Fortunately this doesn't dilute shareholders. But this stock may have more sellers than buyers for a little while as JAB sells.
The good news is that Keurig Dr Pepper's profits are ahead of schedule and management is using some to increase its marketing. That might further bolster some sales growth, which would be good for investors.
