Dr Pepper Snapple Group Inc. Annual Stock Valuation – 2014 $DPS

logoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Enterprising Investor.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Dr Pepper Snapple Group (DPS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Dr Pepper Snapple Group, Inc. (DPS) is an integrated brand owner, manufacturer and distributor of non-alcoholic beverages in the United States, Canada and Mexico with a diverse portfolio of flavored (non-cola) carbonated soft drinks (CSDs) and non-carbonated beverages (NCBs), including ready-to-drink teas, juices, juice drinks and mixers. The Company operates in three segments: Beverage Concentrates, Packaged Beverages and Latin America Beverages. The Company primarily serves two groups of customers: bottlers and distributors and retailers. As of December 31, 2011, it operated 20 manufacturing facilities across the United States and Mexico, excluding its manufacturing facility for its joint venture with Acqua Minerale San Benedetto. Effective March 1, 2013, it acquired Dr. Pepper/7-UP Bottling Co of the West, a producer and wholesaler of bottled soft drinks.
DPS Chart

DPS data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $62.05
MG Value $118.17
MG Opinion Undervalued
Value Based on 3% Growth $44.51
Value Based on 0% Growth $26.09
Market Implied Growth Rate 5.86%
Net Current Asset Value (NCAV) -$24.39
PEmg 20.22
Current Ratio 1.12
PB Ratio 5.35

Balance Sheet – 6/30/2014

Current Assets $1,189,000,000
Current Liabilities $1,063,000,000
Total Debt $2,537,000,000
Total Assets $8,226,000,000
Intangible Assets $5,681,000,000
Total Liabilities $5,957,000,000
Outstanding Shares 195,530,000

Earnings Per Share

2014 (estimate) $3.46
2013 $3.05
2012 $2.96
2011 $2.74
2010 $2.18
2009 $2.17
2008 -$1.23
2007 $1.79
2006 $2.01
2005 $1.88
2004 $1.76

Earnings Per Share – ModernGraham

2014 (estimate) $3.07
2013 $2.79
2012 $2.36
2011 $1.88
2010 $1.43
2009 $1.15

Dividend History

DPS Dividend Chart

DPS Dividend data by YCharts

Conclusion:

Dr Pepper Snapple Group is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor has numerous concerns and in fact is only satisfied by the size of the company and the earnings growth over the last ten years; the company fails the investor type’s other requirements.  The Enterprising Investor is concerned by the high level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.43 in 2010 to an estimated $3.07 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 5.86% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Dr Pepper Snapple Group (DPS)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Dr Pepper Snapple Group (DPS) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


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