The Dwarf Among The Giants

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Based in Texas, Dr Pepper Snapple Group (NYSE: DPS) is an American soft drink company. The company is an integrated brand owner, manufacturer, and distributor of non-alcoholic beverages in the United States, Mexico and Canada.

Dr Pepper Snapple’s Earnings

In mid-February, Dr Pepper Snapple released its earnings for the fourth quarter of 2012. The company missed its estimates and reported earnings of $170 million, or 81 cents per share, versus 77 cents per share last year; analysts were expecting earnings per share of 85 cents. Revenues were up 1.6% to $1.48 billion, but didn’t meet market estimates of $1.49 billion.

According to the company, volumes declined by 1% amid a drop in beverage concentrates. Volume for the Dr Pepper brand was down 1%, while Snapple grew by 1%.

Forecast for 2013

As raw material costs are expected to remain high in 2013, Dr Pepper Snapple Group expects a slightly lower income than analysts’ estimates. High packaging and ingredients’ costs would add cost of goods sold to around 2%. Most of this increase is linked to higher costs of apples, while the rest is associated with corn and paper board. For the full year, the company expects earnings of $3.04 to $3.12 per share and sales growth of 3%. Analysts had expected an income of $3.20 per share on revenues of $6.17 billion.

Valuation

Dr Pepper Snapple Group is trading at a forward P/E (1yr) of 12.92x and has a dividend yield of 3.50. It has a PEG of 2.36 and a growth rate of 6%. Incorporating its dividend yield in its PEG gives us a PEGY of 1.5. Using an industry forward P/E of 15.1x, I would value Dr Pepper Snapple. But, as Dr Pepper Snapple faces competition from giants such as The Coca Cola Company and PepsiCo, I would value it using a discount of 10%.

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Using low estimates, Dr Pepper Snapple’s value comes out to be $43, showing that it’s trading at its fair value. Hence, it doesn’t have any upside potential at the moment.

Competitors

The beverage giant Coca Cola (NYSE: KO) is trading at a forward P/E (1yr) of 16.53x, showing that it’s a rather expensive buy in the beverage industry amid high expectations from investors. It has a dividend yield of 2.70% and a PEG of 1.97. A mean recommendation of 2.2 shows that it’s a far more attractive buy than Dr Pepper Snapple Group. Using earnings multiple, we value Coca Cola at $43, which shows an upside of almost 12%, making it a must-buy. You can have a further look at my detailed take on Coca Cola here.

On the other hand, PepsiCo (NYSE: PEP) trades at a forward P/E (1yr) of 15.84x. It’s yielding a dividend of 2.92% and has a mean recommendation of 2.1 on the sell side. This makes it one of the top buys in the beverage industry. Using earnings multiple, PepsiCo’s value comes out $85, showing that the stock is undervalued by more than 12%. As a result, PepsiCo remains the top buy in the beverage industry. My comprehensive analysis on PepsiCo can be found over here.

Conclusion

In contrast to Dr Pepper Snapple Group, its peers Coca Cola and PepsiCo have shown great results in the fourth quarter of 2012. In 2013 as well, the company will be facing severe competition from these two giants. Dr Pepper Snapple has already lowered its earnings estimates for 2013, which is a sign that the company doesn’t expect that much this year. With PepsiCo and Coca Cola having wide range of beverage products, Dr Pepper Snapple can’t take the risk of increasing its prices. As a result, the margins are bound to stay low.  The bottom line is that at the moment, Dr Pepper Snapple Group doesn’t seem to be an attractive buy in the beverage industry. In short, I remain neutral on Dr Pepper Snapple.


Vamosrafa7 has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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