In today's Oxen Group recap, we will be looking at Dr. Pepper Snapple (DPS) in our daily deeper look as well as looking at eBay (EBAY) after its Black Friday/Cyber Monday sales. The Oxen Group covers Dr. Pepper Snapple year round, and we want to update our current pricing to reflect recent occurrences. eBay is one of the most interesting names, and we want to take a closer look at what's going on after the major sales weekend. Additionally, as always, we will do our typical market overview, important news breakdown, and give our perspective on what's moving the market.
The markets moved mostly lower on Monday after the market got news on Black Friday, ISM Index, Construction Spending, and continued to have many analysts saying that things are overbought in the market. The most recent analyst to throw his comments to the mix was Robert Shiller. He noted he was "worried" about the US stock market. Additionally, information from Black Friday showed that sales were down about 3% year/year, but Apple's (AAPL) iPad, Microsoft's (MSFT) Xbox One, Beats by Dre headphones were winners. The ISM Index came in at 57.3 versus 55.5 expectations. The win there brought more attention to potential taper for the Fed. Construction spending was strong in October, which continues to show housing is starting to recover. The market, though, continues to look overbought on many technical readings.
Dr. Pepper Snapple
Today, we are taking a look at Dr. Pepper Snapple. We had a $62 price tag with a Buy-rating heading into the update. After it, we are now looking at a $54 price tag with a Hold rating as what appeared to be earlier catalysts in TEN has disappointed us.
The soft drink industry continues to see consolidation and lack of demand. The problem is that the North American appetite for soda has diminished as demand has gone into other places like coffee, juices, and more healthy options. Soda has seen a drop in sales volumes for eight straight years.
As a result, Dr. Pepper Snapple has attempted to up its game in non-carbonated beverages with juices from Nantucket Nectars, Orangina, and Snapple. Yet, the company has struggled to grow with volumes of soda continuing to drop. Even in the latest quarter, the company continues to note the issue of declining CSDs:
"Good morning, everyone. I'll start off this morning by saying that we continue to operate in a very challenging environment, not only with macroeconomic pressures, but more importantly, with continued pressures against CSDs."
Looking to 2014 - 2016, the main catalysts for Dr. Pepper Snapple remain somewhat of a mystery. While other competition like PepsiCo (PEP) and Coca-Cola (KO) have gone after new types of business, DPS has been slower to move away from CSDs. The company, instead, wants to continue to push consumers to new styles of soda that are healthier, believing that if they fill the gap of unhealthy claims, they can re-attract drinkers. The company's main initiative has been its Dr. Pepper TEN line that offers drinkers the taste of Dr. Pepper without the calories.
Yet, as the company has noted in its latest quarter, things are still very challenging:
While it's still early, the TEN platform is performing in line with our expectations, even though the category is more challenging than we expected. Trial has met our internal target for the year and repeat is very good. We've reached 76% ACV in grocery, which is in line with the average ACV for the base Core 4 brands in this channel. Based on Nielsen Homescan Research, we know that 51% of TEN's purchases are incremental to the CSD category, which means we are bringing lapsed consumers and occasions back to the category. I've said this many times, but it's worth repeating. We believe this platform is critical because it addresses the caloric intake concerns of consumers, who prefer regular CSDs, but do not want the added calories. We remain committed to the success of this strategic platform and we'll continue to make it a priority in 2014.
Overall, what we are seeing for TEN is that the company is doing a pretty decent job at getting customers to retry the brand and retry CSDs, but its overall impact has been so-so. The company still has seen its Core 4 brands having flat growth this year in volumes, which is better than the industry average. Yet, unlike its competition, we are unsure where the growth is going to come for DPS. The TEN brand has not brought an amazing amount of business despite the fact that the company has marketed it heavily. It has only allowed the company to lose business, which is a tough sell to investors.
We were fond of the company earlier this year because we thought TEN was a great idea. Many males 18-45 do not like to drink Diet soda, and this drink could help bring them back onto the Dr. Pepper brand. While the company has seen some success, it has disappointed us in that it has not helped overall volumes even see any year/year increase. In fact, the only brand that has seen any bump up has been Canada Dry.
We do not believe that marketing and trying to change up the lineup of CSDs is enough for DPS, and we believe that growth will continue to be tempered for the company.
Right now, DPS has a P/E of 15.6 and future P/E at 14.8, so this stock is not overly expensive. Yet, without a ton of growth expected, these valuations make more sense. We have reduced our overall expectations significantly for the company due to the misstep of TEN and lack of catalysts that we can see, but the company still is cheap even if we model it with lower expectations.
Revenue - 2013 revenue will likely be flat year/year around $6B. Moving into 2014, we will expect 1-2% increase and 0-2% growth through 2017. No initiative that we currently see that the company is running will provide significant upside. We continue to see volumes dropping in CSD but GDP will continue to grow, balancing out the drop in volumes. The company, though, will also see some benefit from international growth as well. The company, though, is not pushing into new markets like India and China in the same way KO or PEP is doing it. Overall, therefore, we are not overly optimistic for higher performance.
Operating margins - We foresee operating margins continuing to operate at roughly 17-18%. The company will likely see a slight uptick in operating margins, as the company will likely reduce marketing expenses with TEN starting to take shape. Yet, it is hard to see it breaking above this level because inputs will actually likely continue to tick up.
Capex - The company will likely continue to see capital expenditures at roughly 3% of revenue, and this would jump if they move into another nation with a strong push. Yet, we forecast capex at around 3% since none of those plans have been announced.
When we use this information in a DCF analysis, we use a cap rate for the company of 6.0%, which shows slower growth/risk levels. We used a tax rate of 36%. When we use that, we see that shares are now worth $54 in the worst-case and around $62 in the best case, showing that there is upside in shares. Yet, we are more interested in buying at $42 or lower to get the proper reward for buying.
Today, in our company news section, we will be diving into eBay. The company took center stage after a weekend of shopping. Personally, several members of our own staff reported using PayPal exclusively to pay for various goods on Black Friday. And that anecdotal note appears to have rung true in many homes. EBAY is showing that the combination of both online sales growth for Black Friday as well as a focused online sales day on Cyber Monday are a big win for online retailers, and that trends will push for more of this in the future. While normal brick and mortar stores reported flat to even lower sales year/year, EBAY saw nearly 40% higher sales on Black Friday along with 26% jump on Thanksgiving.
That is before Cyber Monday - the day that has been pushed by online retailers to get people to continue to spend. Expectations were for 131M to shop online today, up from 129M in 2012. ComScore said sales would reach $2B, and FedEx (FDX) noted it would be their busiest day of the year. eBay, who owns PayPal, is not only going to benefit from its online markets but online payments are an ever bigger part of the story.
Cyber Monday comes after EBAY has seen its stock drop nearly 15% since September. The reason for that drop? Earnings on October 16 seem to have disappointed investors. The company reported over 15% jump in earnings year/year as well as revenue. The company beat expectations, but they guided below estimates. The reason for the weak guidance was likely more conservative than actual issues as most see them taking market share and being at the forefront of growing mobile and online payments.
The stock is also not expensive with a 16 future P/E and expectations that it will grow another 15% again next year. Stocks growing at 15% per year consistently are usually priced much more expensively, and this weakness is an obvious buying opportunity. PayPal and eBay are changing the way people buy goods along with Amazon (AMZN), and that shift is going to continue for several years domestically along with international potential as well.
EBAY is cheap and growing - the best combination, and today's statistics only prove that this is happening even further. In a quick pricing model where we use 2014 projected EPS at 3.14 x by current P/E of 24, we get a potential price of $75. Even if P/E drops to a more conservative 20 level, the company is still worth over $65. This recent dip is a golden buying point.
Tomorrow, we will likely be looking for a reaction to Auto/Truck sales on the data front. Overseas, we will get China's Non-Manufacturing PMI and Great Britain's Construction PMI. Other than that, it is a pretty light day. Therefore, we may continue to see some of this softness as people continue to speculate the market is overbought as well as needing of correction. Yet, the real action remains on Thursday and Friday when we get GDP and unemployment data. Look for the S&P 500 (SPY) and Dow Jones (DIA) to react strongly to these developments.