Investing.com -- Citi analysts upgraded Keurig Dr Pepper (NASDAQ:KDP) from Neutral to Buy on Monday, citing improvements in U.S. coffee volumes and the potential for further topline growth.
In their note, Citi highlights that U.S. coffee, which accounts for approximately 26% of KDP's sales and is a major driver of its valuation, is poised for a rebound in the second half of 2024.
This improvement is driven by easier year-over-year comparisons, enhanced scanner data, contributions from new brands, and potential upside from the recently launched K Brew + Chill product line, according to the bank.
"In 2Q24, coffee pod vols returned to flat (+0.2%) vs. -4.5% in the P5Qs and we see a further improvement in 2H24," said Citi, which predicts low-single-digit increases.
This follows a difficult period during which the coffee segment underperformed due to factors such as the post-COVID normalization of at-home consumption and weaker consumer spending.
Additionally, Citi notes that U.S. Refreshment Beverages, which make up 60% of KDP's sales, are also expected to accelerate in the second half of the year.
The firm said recent scanner data analysis shows improvement, particularly from KDP's partner brands, with growth projected to hit around 5%, up from 4% in the first half.
Despite the stock's 12% rise since a better-than-expected Q2 earnings report, Citi sees KDP's valuation as attractive. They explain that the stock trades at approximately 18.3 times 2025 estimated earnings, a 17% discount to competitors Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP), compared to the historical 10% discount.
Citi raised its price target for Keurig Dr Pepper to $43 from $36, reflecting the company's improving outlook, solid performance in its core segments, and potential upside from its new coffee and beverage initiatives.