Morgan Stanley Upgrades Keurig Dr Pepper On Improved Valuation

The bearish case for Keurig Dr Pepper Inc KDP has come to an end after the stock's underperformance over the past year, according to Morgan Stanley.

The Keurig Dr Pepper Analyst

Dara Mohsenian upgraded Keurig Dr Pepper from Underweight to Equal-Weight with a price target lifted from $28 to $29.

The Keurig Dr Pepper Thesis

Morgan Stanley's bearish case on Keurig Dr Pepper was based on part on investor misconception that the company is a high-growth company. Mohsenian said now that the stock has gained just 5% over the past year, which is 1,500 basis points less than the broader consumer packaging group, the stock's valuation more accurately reflects the lower growth profile.

The firm's prior bearish stance was also part of a broader pair trade in which investors should be bullish on Coca-Cola Co KO. The trade has run its course and should appropriately come to an end.

Morgan Stanley's upgrade isn't a call on Keurg Dr Pepper's fourth-quarter report, in which management is likely to offer initial 2020 guidance of 2% to 3% top-line growth and 15% to 17% EPS growth. These figures are in line with the company's three-year profile, but may be overly optimistic. However, the initial guidance should be enough to "calm" invest sentiment.

Shares of Keurig Dr Pepper are trading at around 15.4 times 2021 EV/EBITDA, which is an 11% discount to some of its larger peers which are fair considering lower growth expectations along with higher business and financial risks.

KDP Price Action

Shares of Keurig Dr Pepper were trading lower by 1% at $29.20 Monday morning.

Related Links:

BMO Says The Valuation Discount In Keurig Dr Pepper Is 'Too Large To Ignore'

Morgan Stanley's Beverage Pair Trade: Overweight Coca-Cola, Underweight Keurig Dr Pepper