Stepped Up Competition in Coffee Looms for Keurig Dr Pepper, but Soda Stable; Shares Not a Bargain

Despite cost inflation and macroeconomic headwinds that may impede consumer spending, we continue to believe narrow-moat Keurig Dr Pepper is equipped to navigate the uncertainties on the horizon. We see the company benefiting from an advantaged position in the ready-to-drink beverage aisle (60% of business), given its stout brand portfolio (which underpins strong pricing power and close retail relationships amid secular headwinds driven by health consideration) and distribution clout supported by an integrated and technology-enabled logistics and warehouse network. Our confidence level dips a notch in its coffee system arm, though, due to the prospect of competition heating up and potentially eroding the long-term durability and value of the Keurig ecosystem, a key moat source. That said, we believe the company has tools at its disposal (stepped-up spending in research, development, and marketing and investments in a digitized supply chain and retail relationship) to support its position.