Benzinga | Jun 29, 2021 02:01PM EDT

Why Keurig Dr. Pepper's Low-Calorie Opportunity Is Turning Wells Fargo Bullish

Keurig Dr. Pepper, Inc's (NASDAQ:KDP) relative outperformance is going unnoticed by the market, a Wells Fargo analyst said in a Tuesday upgrade.

The Keurig Dr. Pepper Analyst: Chris Casey upgraded shares of Keurig Dr. Pepper from Equal-Weight to Overweight and increased the price target from $36 to $42.

The Keurig Dr. Pepper Takeaways: Keurig Dr. Pepper has a surging low-calorie carbonated beverage business following the introduction of Dr. Pepper Zero in March 2021, Casey said in the note.

Before this, Keurig Dr. Pepper was in line with competitors Coca-Cola Co. (NYSE:KO) and PepsiCo, Inc(NASDAQ:PEP) in terms of relative low-calorie offering performance, the analyst said.

After introducing Dr. Pepper Zero, the company began to materially outperform its competitors in the low-calorie segment, he said.

Furthermore, flavored carbonated beverages are outperforming cola beverages, a structural advantage Keurig Dr. Pepper holds over its competitors, Casey said.

The Wells Fargo analyst said a favorable pricing environment for North American beverages disproportionately benefits Keurig Dr. Pepper.

Carbonated beverages, as a whole, are underpriced relative to alternatives, and Keurig Dr. Pepper has consistently underpriced offerings relative to peers, he said.

The carbonated beverage industry will see price increases, with Keurig Dr. Pepper having the most room to grow, in Casey's view.

In terms of valuation, the analyst said Keurig Dr. Pepper trades at a discount to all its peers, aside from small or mid-cap stocks where growth is minimal or debated.

KDP Price Action: Keurig Dr. Pepper shares were up 0.59% to $35.08 at last check Tuesday.