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Catching Up on International Markets – Dr Pepper
Posted by: Damian Illia (IP Logged)
Date: November 29, 2013 10:33AM
The non-alcoholic beverage industry is highly competitive. The two largest players are The Coca-Cola Company (KO) and PepsiCo, Inc. (PEP). In an industry which is characterized by mergers and acquisitions seeking for expansion in international markets, let's take a look at one company and see which strategy they are implementing.
Dr Pepper Snapple Group Inc. (DPS) is the number three in the soda ranking with $6b in annual sales and is a leading producer of flavored beverages in North America and the Caribbean. The company has organized its operations into three principal segments: beverage concentrates (20.4% of 2012 sales, with an operating profit margin of 63.4%), packaged beverages (72.7% of sales, with a 12.4% operating margin), and Latin America beverages (6.9%, with a 12.3% operating margin).The company also competes against a number of smaller bottlers and distributors.
In 2012, almost 90% of its sales were generated in the U.S. The rest came from Canada, Mexico and the Caribbean. Those numbers show that the company needs to focus on regions where per capita consumption is still very low but increasing faster. In an effort of global expansion, the firm buys back its distribution rights for Snapple and other non-carbonated beverage brands in the Asian-Pacific region, trying to gain more exposure, the one that Coca Cola and Pepsi already have. Additionally, the company plans to acquire regional bottling companies.
In the non-carbonated beverages (NCB) market segment Dr Pepper participates in the ready-to-drink tea, juice, juice drinks and mixer categories. Key brands of the segment are Snapple, Hawaiian Punch, Mott’s, and Clamato. Taking into account that consumers are more conscious of their health, the firm is launching the Snapple super premium teas and antioxidant waters with functional benefits through its Snapple line.
Let´s make a comparison with the peer group through the next table:
In terms of valuation, the stock sells at a trailing P/E of 15.8x, trading at a discount compared to an average of 24.3x for the industry. Earnings per Share are higher than 74% of the industry. Moreover, Dr Pepper's dividend yield of 3.1% and higher than its peers might attract investors.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. While Dr. Pepper ROE of 27.6% is above the industry mean of 18.3% and also higher than Coca Cola and Coca Cola Enterprises (CCE), PepsiCo and Monster Beverage Corp. (MNST) have higher ROE which looks more attractive. It is very important to understand this metric before investing in a high-growing company.
For a long-term perspective, I would advise fundamental investors to consider adding Dr Pepper to their portfolios as it seems to have two clear drivers for gaining market share.
Hedge fund managers have also been active in the company. Hedge fund gurus like John Hussman, Joel Greenblatt and Murray Stahl have invested in it.
Disclosure: Damian Illia holds no position in any stocks mentioned.
Guru Discussed: Joel Greenblatt: Current Portfolio, Stock Picks
John Hussman: Current Portfolio, Stock Picks
Stocks Discussed: KO, PEP, DPS,