This Beverage Giant Is Betting Big on Alcohol

Joel Litman

There's a once-in-a-generation consumer shift taking place...

And it's probably not what you're thinking of.

The COVID-19 pandemic did a lot to encourage conversations about health and wellness. Folks were stuck isolating at home to avoid a dangerous virus. With little else to do, home workouts surged. 

The focus on health hasn't gone anywhere as the world reopens. Gyms are thriving as people get back to their normal routines. Immune-boosting foods are more popular than ever.

This trend had wide-reaching implications across the health and fitness industry. And it led to another winner in an unexpected place...

Nonalcoholic beer took off during the pandemic. The industry is still expanding today. Sales are up 21% year over year as of August, reaching $395 million. These beverages make up 0.47% of total alcohol sales this year, compared with 0.26% in 2019.

Alcohol-free beer is finally not just for people who want to quit drinking. Folks are paying more attention to what they're consuming. And new nonalcoholic beverage brands are cropping up all over the place.

Even popular coffee and soda company Keurig Dr. Pepper (KDP) is taking notice...

It recently invested $50 million into Athletic Brewing, a big player in the nonalcoholic beer space.

Keurig got its start in the coffee business. It manufactured and distributed various finished goods related to coffee systems, such as brewers, "K-Cup" pods, and specialty coffee.

In 2018, it got into the soda game when it bought Dr. Pepper Snapple. It never waded into hard alcohol... though its recent acquisition is helping get its foot in the door.

This is a smart move. Because there's no alcohol, Keurig isn't taking on any new regulatory risk. And it's still getting exposure to a growing segment.

That doesn't make Keurig a good investment today, though.

The market already has high hopes for the beverage giant...

We can see this using our Embedded Expectations Analysis ("EEA") framework. It uses Uniform Accounting to determine how investors think a company will perform based on the current stock price.

Keurig is already a massively profitable business. Its Uniform ROA has been 70% or above for the past three years. Still, investors expect more.

The company trades for about $38 per share today. At those prices, our EEA tells us the market expects Keurig Dr. Pepper's Uniform ROA to surge to 87%. Analysts expect similar performance, with profitability jumping to 88% in 2023.

Take a look...

That's a big jump... especially from a company whose products are still fairly niche.

Investors have already caught on to Keurig's upside potential...

The company has a good opportunity to grow into the nonalcoholic beer business and improve its returns. However, the market already knows this. It's expecting a lot from an already extremely profitable company.

This goes to show that businesses with a lot of potential aren't always smart investments.

Investors should be wary of putting their money into opportunities like Keurig. With such high market expectations, the company has a lot more to lose than it has to gain. Any disappointing news could hurt investors' outlook on the stock.

Regards,

Joel Litman
November 30, 2022