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Dr. Pepper - The Booster for One's Portfolio
Posted by: Henry Tan (IP Logged)
Date: May 7, 2013 09:50AM
It is no secret that I find Dr. Pepper (DPS) an attractive stock. I originally valued Dr.Pepper at $63.82 on Dec. 31, 2012. The stock price opened at $43.80 that day, and just recently touched a high of $50.29, a 15% gain. In a moment of honesty, I have to admit that I don't find Dr. Pepper as a refreshing drink personally, but it's not what I think that is important, but what Mr. Market, or in this case, beverage drinkers of the world think. Based upon first quarter of 2013's result, I wish to affirm that Dr. Pepper is just the right booster for one's portfolio.
Bottom-line earnings increased to $0.51 from $0.48 year over year, while net sales increased by approximately 1% for the same period. Analysts expected earnings of $0.46 per share, rendering a 10.8% upside surprise. This upside surprise stemmed mostly from a stronger price/mix, LIFO provision of $7 million, and continuous RCI savings. Currently, Dr. Pepper is trading at approximately 16x earnings with a dividend yield of 3.08%, at $0.38 per share. Segment operating profit increased by $19 million and free cash flow totaled $31 million for the quarter.
Like a coin, there are two sides to every story, and on the downside, the 1% increase in net sales was due to "positive price/mix and favorable discounts." In terms of Dr. Pepper's overall portfolio, sales volume were down by 2%. In terms of Bottler Case Sales, Dr. Pepper, Sunkist, 7-Up, Crush, Sun Drop, Hawaiian Punch, Snapple and RC Cola all experienced declines in volume. This is particularly troubling because three of the aforementioned brands are part of the "Core 5," along with its flagship brand, Dr. Pepper. Hawaiian Punch continues to prove to be cumbersome, declining 14% in volume sales for this quarter. Beverage concentrates similarly faced a 1% volume decline, while packaged beverages faced a 4% decline.
The company is surging forward with respect to RCI improvements, and marketing of TEN, Dr. Pepper's version of its low-calorie brands. RCI improvements, since its inception, has totaled in at $127 million, and their goal is to improve their supply chain with a additional $23 million in cost savings realized by the end of the year. Marketing of TEN is quite aggressive, from giving out free cans directly, to teaming up with Redbox among other partners to promote TEN. Furthermore, Dr. Pepper is strategically utilizing social media to promote and hype their products, with consumer produced videos plastered over their official websites. Consumers are becoming more and more health conscientious, and Dr. Pepper hopes to utilize TEN in conjunction with its core diet brands in order to bring back customers.
Forward looking guidance reaffirmed earnings to fall in a tight range between $3.04 to $3.12, with overall annual revenue increasing by 3%. COGS is estimated to increase by 2% linearly with volume due to packaging and commodity cost, and marketing spent on TEN will exceed $30 million. The 2nd quarter may prove to be a tad rougher, as marketing costs will be heavily weighted towards Q2 of 2013. Transportation and field cost inflation are expected to be spread out evenly through all four quarters. Finally, the company remains committed to repurchasing approximately $400 million in stock by the end of the year.
It has always been my opinion that long-term stock appreciation lies in growth. Stagflation is neutral at best, harmful in actuality. When one examines companies such as The Coca-Cola Company (KO), and Pepsi (PEP), it is simply undeniable that their presence is known globally. From the coasts of South Africa to the metropolises of Asia, KO and PEP are international staples. In itself, this is an excellent driver for market realization, but serves as its own double edge sword when one considers that their international expansion options are now limited. Furthermore, these companies were and continue to be exposed to market turmoil and uncertainly, especially in Europe. Admittedly, Dr. Pepper is not solely concentrated in North America, as it does indeed manage a Latin American group, with revenues exceeding $99 million for the first quarter.
With that in mind, my hypothesis lies in the fact that Dr. Pepper's presence in Asia and Europe can be described as minimal at best. However, Dr. Pepper recently reacquired the rights to distribute Snapple from Mondelez International (MDLZ) across several regions in Asia, most notably in countries such as China, Japan and South Korea. From this, I envision this as the first step in many to come with respect to their international expansion plans. Europe and Asia are large untapped markets for Dr. Pepper, and as such, I predict that much of DPS's future growth will stem from these two regions. As such, a close eye should be kept on this distribution chain in Asia, as it will serve as a key determinant of Dr. Pepper's international plans.
From the outlook of the company, it seems to be quite shareholder friendly. Dr.Pepper has repurchased approximately 50 million shares since 2009, approximately 20% of that years float. Likewise, for the same period, dividend per share has increased by 153%, from $.15 to $.38 for the same period. Numerous arguments can now be made with respect to financial theory regarding whether the aforementioned actions are meant as ratio ploys, tax implications, or whatnot, but that is merely semantics. Dr.Pepper has been a proven brand since its inception in 1885, and will continue to be so for the future.
Dr. Pepper is a company that I currently hold a position in, and I plan on acquiring more shares throughout market fluctuations. Dr. Pepper is but in its infancy in terms of global expansion, and from my perspective, quite shareholder friendly. This recent Asia development is music to my ears as it may just be the catalyst needed to propel Dr. Pepper to the world stage as a true global competitor. Furthermore, Dr. Pepper has a large portfolio with different brands catering to different demographics with equally different needs. From Motts, to Dr. Pepper, to Snapple, there is a drink for everyone. As such, Dr. Pepper is just the booster for one's portfolio.
According to GuruFocus:
1. Ken Fisher currently holds 219,144 shares of DPS.
2. The Meridian Funds currently holds 12,000 shares of DPS.
3.The MS Global Franchise Fund currently holds 381,962 shares of DPS.
4. Westport Asset Management holds 300,000 shares of DPS.
5. Robert Olstein holds 146,000 shares of DPS.
6. Murray Stahl currently holds 11,098 shares of DPS.
7. Jeff Auxier currently holds 95,837 shares of DPS.
8. Pioneer Investments currently holds 1,034,170 million shares of DPS.
9. Mario Gabelli currently holds 2,549,968 million shares of DPS.
10. Joel Greenblatt currently holds 44,398 shares of DPS.
Guru Discussed: Jeff Auxier: Current Portfolio, Stock Picks
Mario Gabelli: Current Portfolio, Stock Picks
Stocks Discussed: DPS, KO, PEP, MDLZ,