Keurig Dr Pepper trades at $34.65 per share and has moved almost in lockstep with the market over the last six months. The stock has lost 5.1% while the S&P 500 is down 7.7%. This might have investors contemplating their next move.

Is there a buying opportunity in Keurig Dr Pepper, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Even though the stock has become cheaper, we're swiping left on Keurig Dr Pepper for now. Here are three reasons why there are better opportunities than KDP and a stock we'd rather own.

Why Is Keurig Dr Pepper Not Exciting?

Born out of a 2018 merger between Keurig Green Mountain and Dr Pepper Snapple, Keurig Dr Pepper (NASDAQ:KDP) is a consumer staples powerhouse boasting a portfolio of beverages including sodas, coffees, and juices.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Keurig Dr Pepper’s sales grew at a mediocre 6.6% compounded annual growth rate over the last three years. This fell short of our benchmark for the consumer staples sector.

2. Shrinking Operating Margin

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Looking at the trend in its profitability, Keurig Dr Pepper’s operating margin decreased by 4.7 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 16.9%.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Keurig Dr Pepper historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.5%, somewhat low compared to the best consumer staples companies that consistently pump out 20%+.

Final Judgment

Keurig Dr Pepper’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 17.1× forward price-to-earnings (or $34.65 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.

Stocks We Would Buy Instead of Keurig Dr Pepper

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