Is the Doctor In ?
Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Do you always have to buy the top dogs or will the lesser names work for you sometimes? Does the squeaky wheel get all the grease?
I'll take a look at the soft drink business.
We have all heard about Coke and Pepsi, iconic products made by the top two companies in the industry: The Coca-Cola Company (NYSE: KO) and PepsiCo (NYSE: PEP).
Coke was first sold in Atlanta in 1886. Back then an average of nine drinks were served per day and generated 45 cents in sales. Today Coke is the most popular and biggest-selling soft drink in history, as well as the best-known brand name in the world. It is one of 500 products sold by Coca-Cola worldwide. Total company revenues now top $127M per day. That's an increase of 282,222,222 times. Coca-Cola has steadily increased earnings over time and pays a good dividend, yielding 2.7%.
Pepsi was first sold in 1893 in New Bern, North Carolina. Since then PepisCo has expanded it across the globe. However, there are some problems with the brand name. The word itself is derived from pepsin, which is a digestive enzyme. Maybe not such a good idea to name your drink after something like that. The word also proves difficult for Spanish speakers. They often resort to saying "Pecsi" or simply "Pesi". PepsiCo also grows its earnings and pays a dividend. It yields 3.1%.
Dr. Pepper Snapple Group (NYSE: DPS) is ranked third in the industry by most measures. It makes and distributes a variety of nonalcoholic beverage products, including the well known Dr. Pepper and Snapple brands. The company was divested from Cadbury Schweppes (now known as Cadbury) in 2008. A stock analyst friend of mine says it is always a good idea to look at the company that is being spun-off.
The Dr. Pepper drink was created in Waco, Texas in 1885. The Snapple brand was developed in 1972. At first glance there are no obvious problems with those names. People I know prefer the taste of Dr. Pepper over both Coke and Pepsi.
Since 2009 the company has been steadily growing earnings and should continue the trend. The dividend has been increased regularly and now yields about 3%. It has been systematically buying back shares and is generating positive free cash flow. A potential negative is a fairly high long term debt/equity ratio of 88%. The P/E is about 15 which is in-line with its short historical performance and below the industry average of 19.
The stock has tracked earnings upward and outperformed the market by a factor of more than 3:1.
DPS Earnings Per Share TTM data by YCharts
How does Dr. Pepper stack up against its top competitors with supposedly better brands? Except for debt, the company has similar or better characteristics in several key categories. A distinguishing factor for DPS is the reduction in outstanding shares. Coca-Cola and PepsiCo have not routinely bought back their shares.
| Parameter | DPS | KO | PEP |
| EPS Growth (%) (Past 5 Years) |
6.4 | 11.3 | 3.8 |
| P/E (In-line * ?) | 15.8 (Yes) | 20.3 (Yes) | 18.6 (Yes) |
| Long Term Debt/Equity (%) | 96 | 46 | 98 |
| # Shares Decreasing ? | Yes | Constant | Constant |
| Yield (%) | 3.0 | 2.7 | 3.1 |
(*) In-line with historical performance and the industry
The stock has outperformed both KO and PEP. Not bad for # 3.
So it appears that the top dogs are not necessarily # 1 in performance. A lower tier player can pay off for you under the right circumstances.
The doctor is in. Snap to it.
Mathman6577 owns shares of The Coca-Cola Company. The Motley Fool owns shares of The Coca-Cola Company and PepsiCo. Motley Fool newsletter services recommend PepsiCo and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
