With the soda industry declining in North America, the million dollar question is: is Dr Pepper Snapple Group Inc. (NYSE:DPS) a good long-term buy?
Quarterly earnings
Dr Pepper Snapple’s earnings met its estimates (compiled by FactSet), but fell short on a year-over-year basis. In the second quarter, the company reported a net profit of $155 million, or $0.76 per share, versus $178 million, or $0.83 per share, last year.
The company’s revenue slipped 1% to $1.61 billion, while its sales volume plunged by 4%. Decline in volume was partially offset by high pricing. Operating income also decreased 5% to $285 million.
The primary reason behind low revenue was a decline in Dr Pepper Snapple Group Inc. (NYSE:DPS)’s soda sales, which dropped 3%. Sales volume for its four major brands declined 1% during the quarter. Regionally, North America’s volume dipped 4%, whereas, it jumped 2% in Mexico and Caribbean.
Profit guidance
In the next quarter, analysts expect Dr Pepper Snapple to earn $0.84 per share on revenue of $1.58 billion. For the full year, analysts’ estimates stand at $3.08 per share on $6.10 billion revenue. Dr Pepper Snapple expects itself to make a profit of $3.04 to $3.12 per share during this year.
Recent developments: Institutional investors selling Dr Pepper Snapple
In the last six months, Dr Pepper Snapple Group Inc. (NYSE:DPS)’s institutional investors sold more than 15 million shares, reflecting their lack of confidence in the company. Moreover, company’s insiders also sold almost 335,000 shares during the same period.
Going forward
Given the fact that Dr Pepper Snapple’s core business consists of carbonated-drinks, its future doesn’t look that bright. Unlike PepsiCo, Inc. (NYSE:PEP) and The Coca-Cola Company (NYSE:KO), it doesn’t have the luxury of capitalizing on its still-beverages and food items. Though the company has a vast range of non-carbonated drinks, it doesn’t have strong brands like its big rivals.
With soda sales going down in North America, Dr Pepper Snapple Group Inc. (NYSE:DPS)’s sales volume will go down further. As Dr Pepper Snapple operates largely in the U.S. and Canada, it can’t benefit from a growing soda market in Asia and Africa. However in the case of Mexico and the Caribbean, the company should keep on multiplying its volumes.
Valuation
Dr Pepper Snapple is trading at a forward P/E (1yr) of 14.18 and yields a dividend of 3.2%. Using an industry forward P/E (1yr) of 16.7, I can value Dr Pepper Snapple Group Inc. (NYSE:DPS). But, since it’s expected to underperform its rivals, I would value it using a discount of 10%. Hence, a forward P/E (1yr) of 15.03 would be used for its valuation.
Using earnings multiples, I value Dr Pepper Snapple at $46. This shows that it’s fairly priced at this stage.
Competitors
In the second quarter, the beverage and food giant, PepsiCo, reported a net profit of $1.28 per share, up 36% from the same quarter last year. As soda sales declined across the U.S., PepsiCo, Inc. (NYSE:PEP) relied heavily on its food sector, which grew all over the globe.
Unlike Dr Pepper Snapple Group Inc. (NYSE:DPS), PepsiCo has a huge array of products, through which it can generate healthy margins in the future. The same thing happened in the latest quarter. As soda sales dipped in the U.S., the company got out of trouble by selling more still-beverages and snacks.
In contrast to U.S. and Europe, PepsiCo, Inc. (NYSE:PEP)’s soda drinks should continue to show strength in Asia and Africa, amid less health-conscious people. The bottom line is that PepsiCo will continue to grow itself across the globe, making it the best beverage stock in the industry. You can have a look at my detailed take on PepsiCo here.
In order to expand itself in the U.S. market, Coca-Cola has recently gone through some major strategic partnerships. The Coca-Cola Company (NYSE:KO) extended its ongoing partnership with Universal Parks & Resorts a further ten years. Under the new agreement, Coca-Cola will continue to be the official soft drink of Universal Studios Hollywood, Universal Orlando Resort and Universal City Walk Hollywood. The new agreement would also include The Coca-Cola Company (NYSE:KO)’s sports & energy drinks, teas, and juices.
Lately, the company also made an alliance with California Pizza Kitchen, which will enable it to serve Coca-Cola products at CPK’s 202 restaurants throughout the U.S.
Coca-Cola is trading at a forward P/E (1yr) of 17.82 and yields a dividend of 2.8%, making it slightly more expensive than PepsiCo. A mean recommendation of 2.1 on the sell side suggests that it is still one of the best buys in the beverage industry. My complete analysis on Coca-Cola can be found over here.
Conclusion
As the U.S. and Canada continue to abandon carbonated-drinks, Dr Pepper Snapple Group Inc. (NYSE:DPS)’s market share is bound to go down. With no presence in Asia or Africa, the company won’t be able to generate healthy margins in the future. Excessive selling from its insiders and institutional investors depict that the company isn’t a lucrative investment. In short, Dr Pepper Snapple doesn’t look to be in a good shape. Hence, I don’t recommend buying it.
The article This Soda Maker Is Going Down originally appeared on Fool.com and is written by Waqar Saif.
Waqar Saif has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. Waqar is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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