The soda market is increasing competitive, but one of steadiest investments in the space isn’t the company you’d think.
Investors looking for a beverage stock are likely trying to decide between PepsiCo (NYSE: PEP) and The Coca-Cola Company (NYSE: KO).
However, there could be an even better investment. This company got its start before either Pepsi or Coca-Cola, dating back to 1885.
That company is Dr Pepper Snapple (NYSE: DPS), which has over fifty brands, including 7UP, Dr Pepper, A&W, Snapple and Mott’s.
This often overlooked soda maker trades at a discount to both its major peers, Pepsi and Coca-Cola, on a P/E (price-to-earnings) and P/S (price-to-sales) basis. Dr. Pepper also offers a solid 2.6% dividend yield.
The company is also crushing the competition in terms of returns. Its return on equity and return on investment is above both its major peers.
Dr Pepper largely remains a largely North American company, generating some 88% of its revenues from this region. This comes as it sold off a majority of its international operations before its 2008 IPO.
However, the company is now looking to tap the faster growing emerging markets. It has acquired the rights to enter the Far East and Middle Eastern markets with its Snapple brand.
Along the lines of expanding outside the U.S., one of its key opportunities is Latin America. This region generates 8% of its revenues. It’s a bustling continent in terms of growing middle class and increasing purchasing power.
Dr Pepper has kept true to its beverage roots, not getting caught up in the energy drink craze. It has a strong portfolio of carbonated and still beverages. In terms of flavored non-cola sodas in the U.S., it owns 40% of the market.
Although they are competitors, Dr Pepper has the potential to leverage its Coca-Cola relationship to boost sales. Coca-Cola already distributes Dr Pepper brands via its Freestyle fountain drink machines, but there could be a new opportunity as Coca-Cola enters the at-home beverage market.
Coca-Cola owns 16% of Keurig Green Mountain (NASDAQ: GMCR) and will develop pods for cold brewing carbonated drinks at home. Dr Pepper’s opportunity lies in furthering its partnership with Coca-Cola, in an effort to get a slice of the at-home beverage market with Coca-Cola’s help.
Dr Pepper’s second-quarter earnings came in at $1.06 a share, topping consensus by 17%. With this, management upped its guidance for the full-year. Part of what is driving the earnings growth is a revamped marketing strategy, focusing on its line of TEN products and health drinks.
The other part of earnings growth is a decrease in packaging and ingredient costs. With all this, Dr Pepper is expected to grow earnings at a higher annualized rate over the next five years than either PepsiCo or Coca-Cola. This comes the company is looking to appeal to the health conscious consumer.
As mentioned, Dr Pepper has its TEN platform, which is its low-calorie offering. It also has the potential to make a bigger push into the still beverage market, which includes tea and the likes. Still beverages only make up around a fifth of the company’s revenues.
As mentioned, Dr Pepper offers a modest 2.6% dividend yield, but is also active on the share buyback front. Over the last year it has reduced its shares outstanding by 5% thanks to buybacks.
Yes, shares are up 45% over the last year, but for long-term investors it could be worth buying.
It has a relatively stable business of growing revenues and earnings, and its stock is available at a reasonable price. Dr Pepper is a compelling investment and should be guzzled up sooner rather than later.
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