Should I Buy Dr Pepper Snapple Group Stock? 3 Pros, 3 Cons

by Tom Taulli | June 13, 2012 12:29 pm

Should I Buy Dr Pepper Snapple Group Stock? 3 Pros, 3 Cons

DrPepperSnapplePromo Should I Buy Dr Pepper Snapple Group Stock? 3 Pros, 3 ConsDr Pepper Snapple Group (NYSE:DPS[1]) has shown its resiliency this year, marching forward for the past month-and-a-half while the broader markets have retreated, and recently hitting all-time highs well above $43.

DPS shares are up more than 9% year-to-date, about double the markets. Plus, Dr Pepper has been a consistent winner — for the past three years, the average return for DPS is a hefty 28%.

But after such a strong run-up, should you buy Dr Pepper Snapple stock, or could the growth begin to stall? To decide, let’s take a look at the pros and cons:

Pros

Strong Assets: Since the 1980s, Dr Pepper Snapple has built a strong portfolio of brands through a variety of smart acquisitions. Of course, besides Dr Pepper and Snapple, the company also owns Canada Dry, 7UP, A&W, Mott’s, Sunkist, Crush and Squirt. About 84% of the volume generated from these brands held either the Nos. 1 or 2 positions in their categories.

Dr Pepper also continues to invest in its brands. Some of its recent extensions include Blue Raspberry Crush, Snapple’s Papaya Mango Tea and Mott’s Garden Blend.

Attractive Financials: Dr Pepper has been able to maintain pricing power because of its well-known brands. The result has been higher operating margins and stable cash flows over the years. Because of this, Dr Pepper has been able to buy back large amounts of shares and offer a plump dividend, currently around 3.2%.

Integrated Business Model: This means the company is both the manufacturer and distributor of its own brands. As a result, Dr Pepper Snapple can look for ways to find efficiencies across the whole system, without having to be at the behest of third parties. It also helps Dr. Pepper’s ability to change focus to adapt to new trends in consumer markets.

Cons

Geographic Concentration: Almost 90% of net sales come from the U.S., with 4% in Canada and 7% in Mexico and the Caribbean. The lack of exposure to as-of-late weakening emerging markets might currently be a boon for DPS; however, America is showing signs of decelerating growth, which could have an adverse impact.

Competition: Dr Pepper must deal with intense competitive pressures from Coca-Cola (NYSE:KO[2]) and Pepsi (NYSE:PEP[3]). Both have huge amounts of resources and economies of scale. Coca-Cola and Pepsi also have invested heavily in emerging markets, which have been great sources for growth, and could make it difficult for Dr Pepper to make inroads into these markets. Pepsi also is planning to ramp up its marketing expenditures, which could further hinder DPS.

Changing Markets: About 13.5% of Dr Pepper’s sales come from Wal-Mart (NYSE:WMT[4]). However, consumers’ move toward dollar stores — with players like Dollar Tree (NASDAQ:DLTR[5]), Dollar General (NYSE:DG[6]) and Family Dollar Stores (NYSE:FDO[7]) — likely will put more pricing pressure on premium brands like Dr Pepper.

Verdict

Even after years of strong performance, DPS’ valuation of 16 times earnings is reasonable. And of course, its 3%-plus dividend is a nice pillar of support.

Investors concerned about further slowdown in the U.S. should note that it likely won’t have too big of an impact on Dr Pepper. Purchases for drinks tend to remain fairly stable, and Dr Pepper also should benefit from a moderation of commodities prices, which should help margins.

So should you buy Dr Pepper Snapple? Yes — for now, the pros outweigh the cons for the stock.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”[8], “All About Short Selling”[9] and “All[10] About Commodities.”[11] Follow him on Twitter at @ttaulli[12] or reach him via email[13]. As of this writing, he did not own a position in any of the aforementioned securities.

Endnotes:
  1. DPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DPS
  2. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  3. PEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEP
  4. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  5. DLTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=DLTR
  6. DG: http://studio-5.financialcontent.com/investplace/quote?Symbol=DG
  7. FDO: http://studio-5.financialcontent.com/investplace/quote?Symbol=FDO
  8. “The Complete M&A Handbook”: http://goo.gl/aLNDk
  9. “All About Short Selling”: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  10. “All: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  11. About Commodities.”: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  12. @ttaulli: https://twitter.com/ttaulli
  13. email: mailto:tom@taulli.com

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