Keurig Dr Pepper Inc.'s (NASDAQ:KDP) price-to-earnings (or "P/E") ratio of 22.8x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
Keurig Dr Pepper certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.
Is There Enough Growth For Keurig Dr Pepper?
The only time you'd be truly comfortable seeing a P/E as high as Keurig Dr Pepper's is when the company's growth is on track to outshine the market.
If we review the last year of earnings growth, the company posted a worthy increase of 7.3%. Pleasingly, EPS has also lifted 50% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 13% per year during the coming three years according to the analysts following the company. With the market predicted to deliver 12% growth each year, the company is positioned for a comparable earnings result.
In light of this, it's curious that Keurig Dr Pepper's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
What We Can Learn From Keurig Dr Pepper's P/E?
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of Keurig Dr Pepper's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
You should always think about risks. Case in point, we've spotted 2 warning signs for Keurig Dr Pepper you should be aware of, and 1 of them is potentially serious.
If these risks are making you reconsider your opinion on Keurig Dr Pepper, explore our interactive list of high quality stocks to get an idea of what else is out there.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.