Keurig Dr. Pepper Shares Plummet on Acquisition-Buy the Dip?

Sometimes, the market thinks it has superior judgment over the people in charge of running a company. After all, most shareholders and stock participants can’t see past the next quarterly earnings report, significantly pressuring and limiting a management team from truly achieving long-term success.

Although this is not the norm, it often occurs when companies make a significant move.

Such is the case with Keurig Dr. Pepper Inc. (NASDAQ: KDP). This retail stock fell by over 17.6% in a week, as the broader market deemed the company’s latest move a bad call. A new acquisition in the coffee products industry seems reasonable, considering the current price of coffee, the decline in peer valuations, and the fact that caffeinated soda customers aren’t that far removed from the average coffee enthusiast.

In this sense, investors may notice that the recent reaction to this announcement may have been overdone, creating an opportunity for bold buyers to tag along on a potential rebound opportunity.

Some institutional investors are already taking advantage of this opportunity, and the more subtle area of the market has also noticed it as “low-hanging fruit.”

Why Keurig Dr. Pepper Sold Off

If this sell-off can be boiled down into one word, it would be uncertainty. Most investors are uncertain about the true meaning of this transaction, especially since management has stated that the merger will be followed by a tax-free spinoff, creating two separate companies.

Any reasonable investor would be sitting and thinking, “What will happen to my money?” upon reading this press release. However, nothing will change significantly moving forward; if anything, things may even become more exciting for a portfolio holding this stock right now.

The reason is that Keurig Dr. Pepper will continue to operate as a beverage company, taking what it needs from JDE Peet’s Coffee and also providing the coffee giant with what it needs from Keurig Dr. Pepper. In other words, the spare parts of these two companies can be swapped to create an even better business model.

This is why investors should be excited over the prospect of owning a new and improved Keurig Dr. Pepper (with a forecasted $400 million in cost reduction from the transaction). The world’s largest pure-coffee player can now tap into logistics and materials distribution from Keurig Dr. Pepper.

All told, uncertainty, not fundamentals, sent the stock crashing in the first place. But here’s how markets think it may all play out in the coming months.

Reading Between the Lines for Keurig Dr. Pepper

Fundamental investors in the institutional corner of the market must have done their homework on Keurig Dr. Pepper, even with partial knowledge of this potential deal happening in the future. The conclusion is evident in a new $39.4 million position from Thrivent Financial, just a day after the stock crashed.

If this isn’t a classic dip-buying strategy, then there’s not much else that is.

However, investors aren’t in the clear just yet, since any one buyer could be wrong in their assumptions about the company’s future, and that is where checking the subtle language of the market comes into play.

This message can be decrypted by examining valuation multiples, specifically how Keurig Dr. Pepper trades relative to its peers in the same industry.

Because the market is willing to pay a price-to-earnings (P/E) ratio of 25.8x today, the company stands at a premium above the beverage industry’s 17.3x multiple.

While most investors will react negatively to this number, seasoned operators will nod in agreement, acknowledging that markets are always willing to overpay for companies they believe can outperform their peer group and the broader market.

In the case of Keurig Dr. Pepper, this outperformance may not only come from the cost savings and cash it will receive from the coffee giant's spinoff but also from high future expectations. These expectations are centered around the company’s earnings per share (EPS) for the rest of 2025.

The MarketBeat consensus now reflects Keurig Dr. Pepper could report 64 cents in EPS by the fourth quarter of 2025, a jump of 30.5% from today’s reported 49 cents in earnings.

As most investors know, EPS growth is one of the biggest driving factors behind a stock’s price action, so this current setup definitely begins to justify Keurig Dr. Pepper’s premium and dip recovery.

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The article "Keurig Dr. Pepper Shares Plummet on Acquisition—Buy the Dip?" first appeared on MarketBeat.