This article first appeared on GuruFocus.
Bank of America sees a potentially significant value unlock in Keurig Dr Pepper (NASDAQ:KDP) as the beverage giant prepares to split into two companies in early 2027, adding the stock to its high-conviction U.S. 1 List. The bank's bullish case rests heavily on Beverage Co., where stronger brands, improving distribution economics and a possible valuation re-rating could offset lingering uncertainty around the future Global Coffee Co.
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Keurig Dr Pepper owns a broad portfolio spanning soft drinks, coffee systems and packaged beverages, including Dr Pepper, Canada Dry, 7UP, Keurig and Green Mountain Coffee Roasters. Its planned separation would divide those businesses into a refreshment-focused Beverage Co. and a global coffee company combining KDP's coffee operations with JDE Peet's.
BofA analyst Peter Galbo argues the beverage operation is considerably stronger than it was a decade ago, helped by Dr Pepper surpassing Pepsi in U.S. market share.
"Innovation across zero sugar & flavors should drive consistent MSD topline momentum. Further, success is building, as KDP insources distribution routes from third parties to improve in-store execution/margins," Galbo said.
BofA believes Beverage Co. could eventually command 13 to 17 times enterprise value to EBITDA, implying roughly $31 per share of value.
That is notable with KDP shares trading around $31.52 Monday morning, suggesting BofA sees much of the company's current market value potentially supported by the beverage operation alone.
The coffee side is less straightforward. Galbo highlighted the need for a permanent CEO, post-separation leverage and potential coffee commodity volatility related to Super El Nino as key uncertainties.
The split could make KDP easier to value by separating a steadier, brand-driven beverage business from the more volatile coffee operation.
Investors should watch Beverage Co.'s organic sales growth, margins and progress bringing distribution routes in-house, since those factors will determine whether it earns the higher multiple BofA expects.
For Global Coffee Co., leverage, leadership and coffee input costs will matter most. A clean separation accompanied by improving beverage margins could unlock additional value, while higher commodity costs or excessive coffee-company debt could offset much of that upside.