Dr Pepper: Continued Effective Management

Includes: DPS, KO, PEP
by: Alex Morris

Things at Dr Pepper Snapple Group (NYSE:DPS) have been moving smoothly over the past two years thanks to top management, especially CEO Larry Young. Since being spun off from Cadbury more than two years ago, DPS has returned 38.57% to shareholders, during a time of overall market turmoil.

On Thursday, May 6th, the company reported yet another strong quarter, and has seen solid growth in a majority of their leading brands (see conference call transcript here).

In CSDs, the company managed to increase volume by 2% for the quarter, driven by 3% growth in Dr Pepper due to the continued success of Dr Pepper Cherry and Dr Pepper Heritage. The company’s other CSDs outside of their biggest name also did extremely well, with Crush up 22%, and Canada Dry up 10%.

Outside of CSDs, Snapple and Mott’s also had strong quarter, growing 17% and 14% respectively. The company also placed an incremental 4,500 coolers and vendors in the market place, a key to continue building the strength of the brand name. To build on this, the company is also extending their media investment, and noted that they will spend an additional $25 million in the second quarter in marketing compared to a year ago.

During the quarter, capital allocation was another strong point for the company. When first spun off, management set a goal to reach a capital structure of 2.25x total debt to EBITDA. From a total debt figure of $3.52 billion at the start of 2009, the company has managed to get total debt down to $2.55 billion, and has met their target in less than two years. In the quarter, $405 million of the debt was repaid; on top of that, the company paid out $38 million in dividends to shareholders, and repurchased $202 million worth of shares.

For the year, DPS has reiterated that they expect fiscal 2010 sales to increase 3-5%, and expected diluted 2010 EPS (excluding items) to be in the range of $2.34-2.42 per share. At today’s price of $35.72, the stock is trading at a PE (when using the F2010 earnings estimate of 15.26x on the conservative end.

I feel that management has done a good job since being spun off, and is showing signs that they will continue to build the brand and drive the business into the future; I feel that at this price and without a significant change in the business, a small position in DPS (with larger additions if the price falls back in the $32-$33 range on volatility) would be an intelligent long term investment.

I believe that PepsiCo (NYSE:PEP), Coca-Cola Company (NYSE:KO), and Dr Pepper Snapple Group are all good long term investments based on their current valuations and potential to grow substantially in the next 20 years.

Disclosure: Author holds a long position in PEP