REPORT OVERVIEW
Our group has come to the conclusion that Dr. Pepper Snapple Group, or DPS, is
not a worthwhile investment. Our recommendation is based upon financial analyses and
expert opinions of not only DPS, but the two leading competitors in the beverage
industry. We will demonstrate why it is unwise to invest in DPS Inc. using a five part
report. Our report will cover; financial analyses conducted since the company’s
formation in 2008, a look at the current climate of the entire beverage industry, current
news and business issues, third party analyst’s opinions on the company’s stock and our
final review and recommendation.
INDUSTRY CLIMATE
Many factors play into the volatility of a stock including recession, inflation, and
competition all contribute. DPS has many competitors in the market; PepsiCo or PEP and
Coca-Cola Co or KO are the top competitors. When one of DPS’ competitors launches a
new product or marketing plan for a product, the parallel product in DPS is affected by
sales either lowering or increasing. DPS has competition within itself. Many products like
Crush and Sun Drop are within the same market share creating a less diverse portfolio.
The lack of diversity increases market risk. The beverage industry currently has a growth
rate of 11.7% while DPS has a growth rate of only 4.84% (NASDAQ, 2012). The
industry’s price per earnings ratio is -21.30% while DPS is at 13.54% which is an
average P/E for a company. The industry is losing money, but DPS is still producing
profit.
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(NASDAQ, 2012)
illustration 1A
In illustration 1A, a comparison is made between DPS and its main competitors;
Coca-Cola Co, and PepsiCo. The graph demonstrates a percentage change of the stock
prices since the DPS stock became public on May 7th 2008. Abnormally, DPS’ stock falls
rapidly in its first 18 months, mostly due to the global financial crisis at the time. In mid2009 DPS soars above PEP and stays close with KO from the end of 2010.
Rank by: Sales, in millions of gallons.
1. The Coca-Cola Co., with 5,906.4
2. PepsiCo Inc., 4,126.2
3. Dr Pepper Snapple Group Inc., 2,346
4. Cott Corp., 662.4
5. National Beverage Corp., 400.2
6. Big Red Inc., 55.2
7. Carolina Beverage Corp., 13.8
8. Others, 303.6
(Business Rankings Annual, 2010)
illustration 2A
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Due to the fact DPS has so many products, it competes in almost all sub beverage
categories. When measuring and comparing main products to the competitor’s main
products, a disadvantage is found. 7UP is a leading brand of DPS, as Sprite is for KO,
and Mountain Dew is for PEP. When comparing these beverages by market share, 7UP
has only 1.5% market share, while Sprite has 5.5% and Mountain Dew has 6.1%.
(beverage-digest, 2011)
Rank
Company
2010 Mkt Share
2009 Mkt Share change in share
1 Coca-Cola Co.
42
41.9
0.1
2 PepsiCo
29.3
29.9
-0.6
3 Dr Pepper Snapple
16.7
16.4
0.3
4 Cott Corp.
4.8
4.9
-0.1
5 National Beverage
2.8
2.7
0.1
(beverage-digest.com, 2011)
illustration 3A
In illustration 3A, the market share points of DPS and its main competition for
2009, and 2010 are expressed. DPS is ranked third but their change from 2009 to 2010 is
the highest among its competitors; PEP is actually losing market share points.
DPS’ increase in market share points can be explained by the marketing mix:
price, promotion, product, and place. For place or location, all beverages in the top 3 are
accessible to the majority of the public. All prices of these beverages are very closely
linked, depending on distribution location, such as college campuses where naturally
prices increase. As far as promotion goes, the super bowl was a great indicator that DPS’
main competitors KO, and PEP spent millions on commercials, while DPS did not,
meaning they did not need to because they have increased their market share points by
year round promotion. Finally, most of DPS’ brands are not mainstream beverages unlike
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the “normal” drinks offered by the competitors. As specified previously, this can be a
positive and a negative, but an increase in market share points indicates a positive.
SWOT ANALYSIS
Many factors contribute to a company’s success or failure; some on a
microenvironmental level and some on a macroenvironmental. Taking advantage of the
correct aspect during a market window can increase revenue, while failing to a negative
aspect can lead to catastrophe. A company’s microenvironment consists of strengths and
weaknesses, and a company’s macroenvironment consists of opportunities and threats.
Strengths
Brand loyalty is an important aspect that reflects strength. As mentioned before,
DPS is constructed from many beverage groups, some existing for over 100 years. Brand
loyalty and integrity can be derived from long lasting companies; moreover, Larry Young
a CEO for a long time, and this leadership is a contribution the brand loyalty.
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Weaknesses
Having one company that is constructed from many other companies creates bias
among departments. DPS is a combination of many former beverage companies. Each
branch of DPS is focused on selling their particular product which creates a weakness in
the company.
Opportunities
Given that DPS has so many products, they naturally have opportunity; in other
words, having many products creates many possibilities to develop and increase market
share point to a variety of the market consumers.
Threats
According to research conducted, DPS’ main threat is its competitors, and market
share points being taken away. KO and PEP are the world’s largest beverage companies,
by revenue, and market share. DPS is the third largest beverage company in just North
America.
FINANCIAL ANALYSIS
On May 7th 2008, DPS had their initial public offering. DPS opened that day at
$25.20 and closed that day at $25.50. The DPS stock wasn’t doing very well after its IPO
and had been gradually declining for about a year. On March 9th 2009, the DPS stock
opened at its lowest price in the history of the company at $12.07 (Yahoo! Finance,
2012). The DPS stock closed that day at $11.90 because of one of the worst economic
crashes in US history (Twin, 2009). Over the following year, the DPS stock has been
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steadily increasing in price. However, recently the DPS stock has now plateaued. The
projection for DPS stock is that the stock price should reach $42 by the end of the year,
but it is currently at $39.21 (NASDAQ, 2012). As of now, the DPS stock is falling short
of their goals.
(NASDAQ, 2012) Illustration 5A
On the day that the DPS had their initial public offering, a major competitor, the
Pepsi Company opened at $68.75 and it closed at $68.01. Over the past four years, PEP’s
stock has generally stayed in the same price range excluding March 2009, when the stock
market bottomed out. The projection for the Pepsi Company is that its stock will decrease
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because their current momentum is estimated at 4.09 while their momentum a month ago
was at 4.55 (NASDAQ, 2012).
The Coca-Cola Company, another competitor of the DPS, opened their stock on
May 7th, 2008 at $58.27 and closed at $57.03. Their stock was on the decline until around
June 2010 when it started to increase. KO’s stock is still increasing steadily today. The
projection for the KO is that the stock is going to stay the same because their current
momentum is estimated at 4.08 while their momentum a month ago was at 4.09
(NASDAQ, 2012).
BUSINESS ISSUES
DPS faces many issues that involve the entire beverage industry as a whole.
Natalie Zmuda of the magazine Advertising age has stated “it's a tough time to be the
lead lobbyist and voice of the beverage industry,” (Zmuda, 2011). In her article she gives
several examples of campaigns holding back the beverage industry, including recent
advertisements that associate soda drinks with weight gain. Recently, the beverage
market has shifted towards healthier purchases, with consumers buying lower calorie
alternatives to soda and other high calorie beverages. DPS has realized this problem and
is trying to fix it. Their solution has been to introduce new beverages as an attempt to
make up for the resulting loss of sales due to this shift in the beverage market (“Dr.
Pepper Slims Down Five More of Its Sodas, 2011). Over the past year DPS has
developed 6 new low-calorie beverage versions of their already existing brands. This
began with Dr. Pepper Ten, which is a new version of Dr. Pepper that has only 10
calories. Sales of Dr. Pepper Ten have started off well, and therefore influenced the
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company into creating new versions of this “Ten Series” which include 7-Up Ten,
Sunkist Ten, and several others. While the company hopes that this will serve as a
solution to the problems they are facing, it is still unknown whether this will work or not.
If trends in the market continue to stay the way they are, they will most likely have a
negative effect of DPS stock value. As of now, the introduction of the “Ten Series” has
not had a material effect on the market.
Larry Young is the President and CEO of DPS and has held the position since he
was appointed in October of 2007 (“Our Values”, 2012). Larry Young is outspoken in the
media about the current status of the soda industry. In the upcoming year PEP is planning
on investing an increase of $600 million into marketing their products over the next year.
While this may seem as a bad thing for DPS, Larry Young has shed some positive light
on this situation. On the topic he has said "I get very excited when I see the competition
spend more on marketing, that's good for the industry." He feels that the attracted
attention to the soda industry will result in more sales for every soda company, not just
the one responsible for the marketing. Young also says that PEP’s increased marketing
will further help DPS because DPS and PEP are distributing partners (Ziobro, 2012).
PROFESSIONAL ANALYSES
DPS, a major company in the beverage industry, is analyzed by many professional
organizations. This section of the report focuses on the various professional analyses of
DPS. We have compared analyses conducted by Standard and Poor’s and Value line.
Standard and Poor’s and Value line have their own rating systems which will be reviewed
thoroughly.
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Standard & Poor’s is a financial services company. S&P publishes financial
analyses on stocks and bonds and is recognized as one of the big three credit rating
agencies of the world. S&P’s stock analysis consist of both a quantitative and technical
evaluation of a company’s stock. Quantitative evaluations include the fair value rank, the
fair value price and investability quotient. The technical evaluations rankings include the
volatility, relative strength and insider activity. The following illustrates DPS’ ratings
according to S&P’s stock indices.
Standard and Poor’s quantitative ratings system begins with DPS’ fair value rank.
The fair value rank is based on S&P’s proprietary quantitative model, “the S&P Fair
Value model places a value on a security based on placing a formula-derived price-tobook multiple on a company's consensus earnings per share estimate,”(Standard &
Poor’s, 2012). The fair value rank is based off of a 1 to 5 system, 1 being the lowest score
and 5 the highest. DPS received a score of 3. DPS therefore has a “fairly valued,” rank
according to S&P (Standard & Poor’s, 2012).
The fair value price, also based on S&P’s proprietary quantitative model, is
estimation on what DPS’ stock selling price should be. S&P as of Feb. 23rd estimated
DPS’ selling price at $38.70. DPS’ actual closing price on the 23rd was $38.84.
S&P’s investability quotient or IQ is a percentage based upon comparing DPS’
investability with other companies S&P analyze. DPS received a rating of 32%, meaning
DPS was scored 32% higher than other companies S&P analyzed. This overall is a fairly
low rating for a company to receive.
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S&P technical evaluations are “quantitative rankings based on different metrics:
volatility, relative strength and insider activity,” (Standard & Poor’s, 2012). Volatility
rankings range from; low, average to high. Volatility rank measures how much the stock
price tends to fluctuate during the year. DPS has a low volatility rank meaning that its
stock price does not change by large amounts during the year.
The second technical evaluation is the relative strength ranking. Relative strength
is a 1 to 99 ranking based off the last thirteen weeks as compared to all other companies
in the S&P universe (Standard & Poor’s, 2012). DPS currently has a rating of 43 which
S&P claims falls into the “moderate” range.
The last technical evaluation is the insider activity ranking. Insider activity ranks
from low, neutral to high. Insider activity is “analysis of significant activity from
company directions, officers and key employees” (Standard & Poor’s, 2012) DPS
received a rank of neutral.
Standard and Poor’s gives an overall rating for all the stocks they evaluate. The
ranking is from 1 to 5 stars. DPS was giving the rating of 3 stars by S&P meaning hold or
don’t buy.
Value Line is another independent investment research and financial publishing
firm. Value line rates and compares approximately 1700 stocks (Value Line, 2012).
Value line has two sections for rating stocks; ranks data and ratings data. The ranking
data consist of; timeliness, stock price stability, technical and beta. Ratings data consist
of; financial strength, stock price stability, price growth persistence, and earnings
predictability.
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Timeliness, according to Value Line, is the “measure of the expected price
performance of a stock for the coming six to 12 months relative to our approximately
1,700 stock universe,” (Value Line, 2012). The rank is from 1 to 5 with 1 being the
highest. High rankings are likely to do the best in the market. DPS received a ranking of
2.
Safety measures the total risk of a stock based on price stability rank and financial
strength ratings. Safety like timeliness is measured on a 1 to 5 scale with 1 being the
highest. DPS received a ranking of 3.
Value Line’s technical ranking is based on “proprietary ranking of estimated
stock price performance relative to the overall market in the next three to six months,
based on a complex analysis of the stock’s relative price performance during the previous
52 weeks,” (Value Line, 2012) Technical rank is again based on a 1 to 5 scale 1 being the
highest. High ranking stock is expected to outperform the market while low stock is
expected to underperform. DPS received a ranking 3.
Beta is a “relative measure of the historical sensitivity of the stock’s price to
overall fluctuations in the New York Stock Exchange Composite Index,” (Value Line,
2012). Beta scores in the long term converge at 1.00 and explain the risks involved with
investing in a stock. A Beta risk of 1 means that a company’s stock will move with the
market. DPS earned a Beta score of .75.
Relative strength is a measure of fiscal strength in a company. The ratings range
from A++ to C in nine steps (Value Line, 2012). DPS earned a rating of B+.
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Lastly Value Line rates stock price stability. Stock price stability is “A relative
ranking of the standard deviation of weekly percent changes in the price of a stock over
the past five years,” (Value Line, 2012). Stock price stability explains how volatile a
stock’s price is. Stock stability is ranked 5 to 100, 5 being the least stable 100 the most
stable. DPS scored 80 on Value Line’s stock stability ranking.
Based upon our findings and the rankings of professional stock analyst we have
concluded that it would be unwise to invest in DPS at this time. DPS’ rankings for the
most part are healthy or in a positive area they do not show much in the way of growth or
returns.
GROUP RECOMMENDATION
Based on the research gathered, it is unadvisable to invest in DPS stock at this
time. DPS’ current stock prices and trends volatility make the likelihood of earning profit
in the short and long run very miniscule. This however, does not apply to DPS alone. The
entire beverage market in general is not producing much in the way of profit margins.
The best stock to purchase in the industry would be KO, although it would be unlikely to
garner much profit. In conclusion, we advise you to invest in another market.
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Bibliography
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Beverage Digest is an online publication that covers and ranks the beverage industry;
excluding alcoholic beverages. John Sicher is an analyst that conducted research of the market
share fluctuations in the beverage industry. We used ranks that describe market share and
compare market share of the top companies in the industry. We transferred the information from
this publication to excel, and only used the top 5 companies in the industry. Moreover, we
excluded old data that was not relevant to our report. This source is targeted for marketers of the
beverage industry; it is a professional source that provides data on the marketing fluctuations.
This source was in a form of a table; however, we have modified it into a more relevant table.
There are no critics of this source; it is a data gathering publication and it is objective. There is no
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website. There is no individual author for this source because it is part of a report done by the
website. This source provided us with a rank of companies by millions of gallons per year; this is
exceptionally important because it gives raw data for comparison. Gale is a research and
publication firm that works with libraries across America. The target audience of this tool is for
any researchers or analysts that need information to complete a report. This source was very
useful; it provided us with subjective information. The main use of this source was in a form of a
chart. . There are no critics of this source; it is a data gathering publication and it is objective.
There is no bias in this source; it is a data provider, so it is objective.
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Yahoo Finance is a financial community website. There are no authors for this article
because the website is comprised of raw data. The website is targeted towards potential
stockholders who would like to learn about the company. This material is not bias. Special
features include charts of the company’s stock prices which should not be bias because that is an
illegal matter. No opinions are given on this website. This source is valuable for research because
it shows trends of DPS stock in the stock market. Much of the financial analysis of this report is
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based off of this information. No one really critiques this source and it is a generally accepted
source of information.
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<http://www.drpepper.com/>.
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anyOverView.do>.
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company analysts and used by financial entrepreneurs around the world. Their financial analyses
are constructed through their own quantitative model. SP analysts strive for unbiased reporting
based on the model they employ. SP has their own custom rating systems which consist of
quantitative and qualitative information. SP is a widely respected financial publishing used by
many professional entrepreneurs.
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<http://www3.valueline.com/vlquotes/quote.aspx>.
Value Line is an online financial publishing company. Their online database, made by
company analyst, analyzes major companies traded on the stock market. Value Line uses their
customized mathematical model to report on various company financial ratings. Value Line is
marketed towards professional financial entrepreneurs. Value Line has several custom rankings
based upon there mathematical model. Value Line is consider by many professionals as a very
creditable financial reporting firm. Some critics argue that there mathematical model is not the
most accurate way to portray a company’s financial standings.
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Nasdaq is a financial, community website. Because Nasdaq is a database, there are no
authors. The target audience is future investors and people seeking financial information of the
company. The database is objective so there is no bias. The website has graphs and may be
misleading because of the x and y axis. No opinions are given on this website. The data was
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useful because it was essential in order to find out the present and future stock prices. The
financial analysis section of our report relied heavily on the information found on the website.
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Street Journal: B.4. National Newspapers Core. Dec 03 2011. Web. 23 Feb. 2012.
Paul Ziobro is an author for the Wall Street Journal who often has his own part of the
newspaper titled “Corporate News.” In this article he describes how the market of the beverage
industry is shifting towards lower calorie purchases. The audience of the Wall Street Journal
typically contains people interested in finance. It is widely-known as an un-biased publication.
No special features are used in the article, and they are also no conclusions or recommendations
given. Due to its unbiased nature, this article is a very useful source. It has not been critiqued.
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Wall Street Journal: B.4. National Newspapers Core. Feb 16 2012. Web. 23 Feb.2
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Advertising Age. (March 7, 2011 ): 710 words. LexisNexis Academic. Web. Date
Accessed: 2012/02/23.
In this article author Natalie Zmuda writes about how the beverage industry is currently
struggling. The article was written for a publication named Advertising Age. The audience of the
article is mostly people interested in advertising and marketing, therefor the author writes about
DPS’ struggles in the industry as a result of advertising against the beverage market. As a result
the article could be bias to further portray the power of advertising. No special features are
involved in the article. This is a very credible source because many of the points made are based
on fact. This source has no critics.
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