Street Calls of the Week
Investing.com - HSBC downgraded Keurig Dr Pepper (NASDAQ:KDP) from Buy to Hold and slashed its price target to $30.00 from $42.00 following the company’s announcement to acquire JDE Peet’s. According to InvestingPro data, the stock is currently trading near its 52-week low of $30.12, with technical indicators suggesting oversold conditions.
The downgrade comes after KDP shares fell 11.5% following the acquisition news, with HSBC analyst Sorabh Daga expressing concerns about the company’s decision to leverage itself up to "6-8x net debt/reported EBITDA to exit the Keurig coffee business." The company’s current ratio of 0.64 already indicates that short-term obligations exceed liquid assets.
HSBC views the valuation of the acquisition at 12.9x next year’s EV/EBITDA as "rich" and notes the deal will be dilutive on margins for KDP’s coffee business while adding substantial debt to the balance sheet.
The firm introduced a 2% governance discount in its discounted cash flow analysis, citing questions about the deleveraging schedule, future debt allocation between coffee and soft drinks divisions after planned separate listings, and JAB’s continued influence despite reduced ownership.
KDP is targeting synergies of $400 million over three years from the acquisition, though HSBC noted management barely discussed other strategic options when questioned during the investor call.
In other recent news, Keurig Dr Pepper has announced its acquisition of JDE Peet’s, a deal valued at approximately $18 billion. This significant move will result in the company splitting into two separate entities. To finance part of this acquisition, Keurig Dr Pepper is considering selling debt in the European bond market, as reported by Bloomberg. The company’s CFO, Sudhanshu Priyadarshi, mentioned that the structure and location of the debt sale will be determined in the coming months.
In light of these developments, Moody’s Ratings has placed Keurig Dr Pepper under review for a potential downgrade, affecting its Baa1 senior unsecured ratings and Prime-2 commercial paper rating. Similarly, S&P Global has placed the company on a negative credit outlook watch, citing concerns about increased debt levels post-acquisition. RBC Capital, however, has reiterated its Outperform rating on Keurig Dr Pepper, maintaining a price target of $42.00 despite the stock’s negative reaction to the acquisition news.
In related developments, JPMorgan has upgraded JDE Peet’s stock rating from Underweight to Neutral, raising its price target to EUR31.85, following the acquisition announcement. This upgrade reflects the agreed all-cash transaction, valuing JDE Peet’s at EUR15.7 billion, or EUR31.85 per share, which is a 20% premium to its previous closing price.
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