Dr Pepper Snapple Group (DPS) has been performing much better than competitors Pepsi (PEP) and Coca-Cola (KO), but it can’t seem to get out of their shadow.
Part of the reason is PEP and KO have been retooling their brands and distribution channels for a while now. Their massive international exposure hasn’t been a good thing in recent quarters because the strong dollar has softened the impact of foreign currency sales.
Revenue generated overseas is converted back to U.S. dollars, but if currencies in foreign markets are weakening, earnings will go down.
The thing is, these problems are really DPS’ problems. Its market cap is about 10% the size of PEP and KO. DPS makes niche products primarily for the U.S. market, and that is a big advantage. However, most analysts paint DPS with the same brush as its two behemoth compatriots.
But, where both KO and PEP ground out a barely breakeven year in 2015, DPS finished up 18%. That was because it was beating estimates and coming in with solid earnings. Even now, DPS is a fairly contrarian play with 20 analysts giving it a hold rating and only four calling it a buy. Goldman Sachs lowered the stock to a sell just this week.
This is certainly a contrarian play relative to the analysts, but this is one of those times when the Street sees things the way it wants to, not the way they actually are.
But, as individual investors, this gives us a great opportunity to buy DPS at a good price.
DPS Is Expanding Its Brands Even Further
DPS owns the major brands Dr Pepper, Canada Dry, 7UP, A&W, Hires, IBC, Stewart’s, Sunkist, Squirt, Crush, Schweppes, Vernor’s, RC Cola, Snapple, Hawaiian Punch, Mott’s, Clamato, YooHoo, Aguafiel, Mr & Mrs T, Rose’s, Margaritaville, and others.
If you notice this selection, Dr Pepper is the only brand that is a classic caffeinated product, while the rest are true soft drinks, both carbonated and non-carbonated. With the move of many Americans to less sugary and caffeinated products for their families, DPS is in a very special position.
Its stable of boutique brands also help boost margins, and they provide a nice upsell opportunity from the company’s basic consumer brands.
What’s more, DPS has expanded into the energy drink market with its Venom brand. The energy drink market is expanding quickly, both in the U.S. and abroad, and given DPS’ distribution channels this sector has great potential in coming years.
Remember, this isn’t going to be a KO one day. DPS is a solid company with good management and excellent, enduring brands. It also has a nice 2.1% dividend, which will increase as the herd sells this off a bit.
Granted, DPS hit an historic high at the end of 2015, but this stock has a lot of potential and is trading at a slightly lower P/E than KO or PEP, with more upside.
Ignore the herd.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
