Piper Sandler analyst Michael Lavery initiated coverage on Keurig Dr Pepper Inc (NASDAQ:KDP) with a Neutral rating and a $35.00 target price.

The analyst voiced caution regarding ongoing coffee-related challenges, citing sluggish top-line momentum, recent spikes in coffee input costs, and uncertainty surrounding additional pricing opportunities.

Although the company has announced mid-single-digit pricing, coffee input costs continue to escalate, impacting margins, said the analyst.

The analyst noted that the U.S. Refreshment Beverages had +5.8% U.S. measured retail sales growth in the latest 52 weeks 2024TD, while its U.S. Coffee segment is pressured, with retail sales down 4.3%.

Despite strong performance in its U.S. Refreshment Beverages (USRB) and International segments, the company faces challenges due to the surge in coffee bean prices, which have risen to a 47-year high, asserted the analyst.

KDP has been able to drive growth primarily through its USRB

and International segments, which solidly contributed to the company's EBIT growth in recent years.

The analyst noted that the coffee segment has been underperforming, with its overall growth constrained by the rising costs of coffee beans.

According to the analyst, the deal to acquire a 60% stake in energy drink brand Ghost is expected to provide a new growth avenue, which helped boost C4's market share by over 1%.

However, the immediate outlook for margin expansion is challenged by coffee price pressures, warned the analyst.

The company's current valuation, based on a 16.0x P/E multiple to its projected 2026 earnings per share of $2.14, suggests an 11% upside to its $35 target.

This target price remains below its historical five-year average, said the analyst, reflecting the uncertainty in the coffee segment's performance and the broader market conditions.

Price Action: KDP shares are trading lower by 0.85% at $30.82 at the last check Tuesday.