Relative to food-oriented peers, KDP benefits from exposure to faster growing, higher margin beverage & coffee categories. However, coffee categories are exposed to underlying commodity swings; coffee is currently experiencing an inflationary cycle.

Management has adopted a more conservative posture on leverage and reduced its target by half a turn to 2.5x or lower. The reduced leverage target implies roughly a full turn of improvement from current levels in the mid-3x area.

Despite the current emphasis on leverage reduction, management has maintained that M&A remains a longer-term priority. Still, we are comfortable with KDP credit and favor taking on any spread pickup opportunities over F&B peers.

Management has historically guided to M&A as a key capital allocation priority, but recent deal activity has been biased toward bolt-on opportunities and management emphasized integrating recently purchased assets while bringing leverage down to the 2.5x area.

KDP has exposure to elevated input costs, particularly for green coffee beans. KDP took pricing in coffee, and is expecting some elasticity, but they plan to management to stable profit dollars, and could seek to raise prices further in 2025.

Given the increased value-seeking mindset of consumers, KDP could see a tradedown benefit if coffee prices rise across the board.