Dr Pepper Snapple (DPS) is among the leading beverage companies of the U.S., with a market share of 16%. The company has delivered a solid financial performance in recent years. The company remains focused on optimizing cash generation, returning cash to shareholders, and improving upon its cost structure to boost its bottom line results. DPS offers a solid dividend yield of 3.2%. Also, analysts have forecasted an attractive next five years growth rate of 7.9% per annum for the company. Moreover, current valuations remain attractive for DPS, and based on my price target of $52.5 (using P/E multiple valuation, as shown below), the stock offers potential price appreciation of 7.5%. Therefore, I reiterate my bullish stance on the stock.
The company has delivered a healthy financial performance over the years. The company reported adjusted earnings per share of $0.88 for 3Q2013, representing an increase of 11% as compared to the corresponding period last year, beating consensus estimates of $0.83. Earnings for the recent quarter were positively affected by productivity improvements, lower share count and price increases. The company reported total sales of $1.54 billion, up 1% year-on-year. Revenues for the quarter were positively affected by an approximately 2% price increase. DPS experienced a sales volume decline of 1% year-on-year in the recent third quarter due to declining volumes for the carbonated soft drinks (CSD) category.
Stock Price Catalysts
DPS has a strong product portfolio, which remains an important stock price driver, as approximately 75% of its total revenues are derived from products that are either holding the number 1 or 2 positions in their respective categories. Despite the fact that the company experienced a sales volume decline of 1% in 3Q2013, volumes of the company's top four brands were flat for the quarter. Also, six of the company's top 10 products are non-cola soft drinks, which have shown a stable sales volume trend in recent years. Moreover, product innovation has remained an important tool in DPS' hands to offset the sales volume decline of the CSD category, and it remains an important stock price driver in the future.
To support its product innovation, the company has been aggressively undertaking advertisement and marketing activities, which I believe will portend well for the company's future sales. The following table shows advertisement and marketing (A&M) spending comparison between DPS, PepsiCo (PEP) and Coca-Cola (KO).
A&M to Sales Ratio
Source: Companies' Reports
The company has also been working to improve upon its operational and productivity efficiency to support its bottom line results. In the recent third quarter, the company achieved its full year 2013 $150 million cash cost saving target, one quarter earlier than expected, by delivering total cash cost savings of $156 million year-to-date under its ongoing Rapid Continuous Improvement (RCI) Program. The company has been working to identify areas for further future cost savings. As the company continues to improve upon its cost structure, these efforts will fuel DPS' bottom line growth for the future.
DPS also has a shareholder-friendly management, which has been sharing its success with shareholders. The company currently offers a solid dividend yield of 3.2%, backed by its free cash flow yield of 7.2%. Also, the company has been aggressively undertaking share repurchases. In the last two years, the company has spent approximately $1.2 billion to repurchase shares; representing approximately 12% of its current market capitalization. The company's share repurchase initiatives are likely to fuel DPS' bottom line result and magnify ROE, as we move forward. The following graphs show an increase in ROE for DPS in recent years and a healthy free cash flow and dividend comparison, indicating sustainability of dividends.
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Source: Company Reports and Calculations
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Source: Company Reports, Projections and Calculations
Target Price: Discounted Cash Flow (DCF) and P/E Multiple
Calculating a price target using free cash flow projections until 2016 and a WACC of 7.6%, I calculated a target price of $50 per share. Also, in the calculation for the target price, I used a terminal year growth rate of 1%.
Terminal Value of Free Cash Flows
Free Cash Flow Estimates ($ millions)
Present Value ($ millions)
Source: Projections and Calculations
Total Value of firm = $734 + $687 + $675 + $10,355= $12,451 million
Total Debt = $2,540 million
Total Equity Value = Total Value to firm - Total Debt
$9,905 = $12,451 - $2,540
Shares Outstanding =200.6 million
Target Price = Total Equity Value/ Shares outstanding
$50 = $9,905/200.6
P/E multiple Valuation
I calculated the price target of $52.5 using the S&P 500 forward P/E of 16x and DPS' 2014 EPS estimate of $3.28. Based on my price target $52.5, the stock offers potential price appreciation of 7.5%.
2014 EPS estimate
Health concerns related to the consumption of CSD are on the rise and pose a threat to the company's sales volume. Also, the imposition of potential taxes on the consumption of sugary soft drinks poses a threat to the company's top and bottom line results. Recently, San Francisco became the latest U.S city to propose a tax of a $0.02 per once on sugary drinks. If the tax proposal is accepted, it will result in an extra $0.24 per average 12-ounce can of soda.
Moreover, almost 11% of the company's total revenues are generated from markets outside the U.S., which exposes DPS' top line to foreign currency movements and the strengthening of the dollar, both will have an adverse impact on the company's top line result in the future.
The company has posted a healthy financial performance in recent years. Also, the company's product innovation and cost control efforts are likely to portend well for the stock price. Moreover, the stock is currently trading at attractive valuations in comparison to its peers; DPS has a cheap forward P/E of 14.6x in contrast to PEP's forward P/E of 18.3x and KO's forward P/E of 18x. Due to the aforementioned factors, I am bullish on the stock.