Dr. Pepper Snapple Group (DPS) Covering Analyst: Joshua Jordan

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Dr. Pepper Snapple Group (DPS)
Covering Analyst: Joshua Jordan
[email protected]
DPS History
› Dr. Pepper brand since 1885
› Series of Acquisitions
› Most recent: DPSU, DPSUBG
› Incorporated October 24, 2007
Business Overview
› Brand Owner
› United States (89%)
› Manufacturer
› Canada (4%)
› Distributor
› Latin America (7%)
Dr. Pepper, 7-Up, A&W, Sunkist, Canada Dry, Snapple, Hawaiian Punch, Mott’s
Dr. Pepper Snapple’s Strategy
› Expand distribution channels
› Build and enhance existing brands
› Take advantage of high-margin channels
› Become more efficient through RCI
LRB Industry
› Highly Competitive
› Centralized
› 15.2 Billion Cases
2011 LRB Market Share
34% Coca-Cola
27% PepsiCo
11% Dr Pepper Snapple
10% Nestle Waters
4% Cott
14% Other
CSD Industry
› Dominated by CocaCola, PepsiCo, and
Dr. Pepper Snapple
› 9.3 Billion Cases
2011 CSD Market Share
41.9%
KO
28.5%
PEP
16.7%
DPS
5.2%
COT
2.8%
FIZZ
1.2%
MNST
3.7%
Other
Risks and Drawbacks
› Consumer Health Preferences
› Commodity Prices
› Health Regulations
› Competition
› Retail Contracts
Positives
› Research and development is creating healthier
beverages
› Penetrating distribution channels
› More efficient operations through RCI
Revenue
› Beverage Concentrates
2008 Revenue
Beverage
Concentrates
17%
Latin America
Beverages
7%
– Highest Margins
› Packaged Beverages
Packaged
Beverages
76%
– Lowest Margins
› Latin America Beverages
Projected 2017 Revenue
Beverage
Concentrates
20%
Latin America
Beverages
8%
Packaged
Beverages
72%
Customers
› Retailers
– Wal-Mart (10% of
total sales)
– The Kroger Co.
– Safeway
› Food Service
–
–
–
–
–
Mcdonald’s
Yum!
Burger King
Sonic
Wendy’s
› Convenience
Stores
– 7-Eleven
DCF Expectations
› Increasing COGS as a percent of revenue
› SG&A decreasing slightly as a percent of revenue
› Tax rate increasing to 37%
› Gradual rates as opposed to straight-line rates
› Increasing capital expenditures
DCF Valuation
› Possible reasons for
price differential
– Beta
– Cost of Debt
Implied Price
60
Current Price
46
Undervalued
30.28%
Comparables Screening
› Industry
› Licensing
› Size
› Beta
› Growth
› Margins
Comparables
› Coca-Cola (KO) – 30%
– Coke, Fanta, Sprite, Barq’s
› PepsiCo (PEP) – 30%
– Pepsi, Mountain Dew, Sierra Mist, Mug
› Monster (MNST) – 20%
– Monster, Hansen’s
› Cott (Cot) – 10%
– Cott, RC Cola
› National Beverage (FIZZ) – 10%
– Shasta
Forward Comparables Valuation
Multiple
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Market Cap/Net Income = P/E
Price Target
Current Price
Undervalued
Implied Price
$66.20
74.41
53.54
49.49
46.73
48.78
$51.52
45.20
13.98%
Weight
10%
0%
20%
50%
15%
5%
Final Valuation
Source
Forward Comps
DCF
Price Target
Current Price
Undervalued
Implied Price Weight
$51.52 50%
59.84 50%
55.68
45.20
23.18%
Profit Returns
› Dividends
› Stock Repurchases
450
400
350
300
250
200
150
100
50
0
DPS
100%
80%
Stock Repurchases
Dividend
Percent (%)
Cash Flow (millions $)
DPS
60%
40%
20%
0%
Stock Repurchases
Dividends
Comparable Profit Returns
Recommendation: Hold for Tall Firs and Svigals
› Outperforming strong competitors in market share
› Increasing profit returns to shareholders through
dividends
› Innovative product line and cost-cutting techniques
› Note: Future update is important to valuate success of
ten-calorie soda lines
Questions
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