I am a retail investor that writes with the hope that I am providing a good and transparent example of what due diligence should be. I believe that due diligence in the process by which one gathers the data to set RRR (required rate of return or risk) assessments and dividend CAGR (compound annual growth rate) projections.
I want to be informed by the borrowed opinions from quality sources. But I also want to have the data that confirms (or maybe sometimes rejects) those opinions.
I have recently added Dr Pepper Snapple Group (DPS) to my consumer staple coverage universe. In this post, I want to share where and how I spent my time generating a risk assessment on DPS.
(1) I borrow opinions from the credit markets. I added data on one DPS bond - the bond closest to a ten year maturity - to the bond data from other consumer staples companies. Here is that data:
Publicly Traded Bonds - Updated 11-30-15
The BBB+ rating is a little better than average - which would indicate that DPS fits right in with the risk picture for the sector. The yield on the bond is quite a few bps above average. This metric would indicate that DPS is a higher risk company. The "BBB+" is an opinion without money behind it. The "3.6170%" yield is a market set opinion - it has money backing that opinion. On the other hand, the price is a snap shot of one moment in time.
The sum of the impression from these to two data points is a wishy-washy DPS may be riskier than average assessment.
(2) I heavily lean on historical EPS projection accuracy for my risk assessments. For many companies, my lack of access to a time machine that lets me gather the beginning of the year projections from 2015, 2014, ect. . . means that it takes a three or four years to have the numbers to set an accuracy rating.
I really like companies that provide beginning of the year projections for their earnings. The fact that they offer guidance is frequently a clue that their business model results in better than average earnings predictability. Add, to that, we can go back in time to view beginning of the year projections for prior years. Here is that data for DPS:
On 2-15-15 DPS projected core EPS to be in the $3.80 to $3.88 range after the impact of foreign currency, which is expected to negatively impact net sales and core EPS growth by approximately 1% and 2%, respectively.
On 2-12-14 DPS projected net sales to be flat to up 1% and Core EPS to be in the $3.38 to $3.46 range. 2014 core EPS was $3.65.
On 2-13-13 DPS projected net sales growth of approximately 3% and diluted earnings per share to be in the $3.04 to $3.12 range. 2013 core EPS was $3.20. Sales were flat.
On 2-15-12 DPS projected net sales growth near the low end of its long-term 3% to 5% range and diluted earnings per share to be in the $2.90 to $2.98 range. 2012 core EPS was $2.92. Sales were up 2%.
On 2-17-11 DPS projected net sales to increase 3% to 5% and diluted earnings per share to be in the $2.70 to $2.78 range. 2011 core EPS was $2.85. Sales were up 5%.
On 2-26-10 EPD projected net sales to increase 3% to 5% and diluted earnings per share to be in the $2.27 to $2.35 range. 2010 core EPS was $2.40. Sales were up 2%.
On 3-29-09 DPS projected EPS before a one time tax gain to be $1.59 to $1.67. 2009 core EPS was $1.97.
2008 core EPS was $1.85.
Here is what I learned from that data collection - a process that does not take that long for anyone to do. (1) DPS set conservative EPS targets - I probably need to use the high point for my analyst median. I will get confirmation of this in February of 2016 when the new projections come out and the analysts set updated 2016 guidance. (2) Even when using the high point, DPS has had only one year of EPS disappointment. Even that 2012 disappointment was small (six cents). The result of this due diligence is a very low risk assessment of DPS.
Why does this matter? Let's look at the data through 12-04-15:
The Correlation of EPS Revisions to year to date returns The following companies had growing EPS estimates since the beginning of 2015: CLX, DPS, GIS and HRL. Their mean price gain for the year is 27.79%. Their mean total return for the year is 30.51% - and 3 of the 4 beat the sector median yearly price gain. Their mean target change for the year is 19.35%. Their mean accuracy rating is 1.13.
The following companies had decreases - but decreases of less than 5% - to the EPS estimates: KO, CAG, INGR, KMB, LANC, MKC and SJM. Their mean price gain for the year is 14.24%. Their mean total return for the year is 16.62% - and 5 of the 7 beat the sector median yearly price gain. Their mean target change for the year is 17.22%. Their mean accuracy rating is 2.01.
The following companies had decreases to the EPS estimates of more than 5% since the beginning of 2015: ADM, CL, HSY, K, PEP and PG. Their mean price gain for the year is -8.69%. Their mean total return for the year is -6.32% - and 0 of the 6 beat the sector median yearly price gain. Their mean target change for the year is -3.58%. Their mean accuracy rating is 2.23.
The degree to which the 2015 class of 'revision out performing companies' have price appreciation that echoes that out performance is higher than typical. But it almost always happens - just in smaller degrees for price out performance.