Has Dr Pepper Snapple Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Dr Pepper Snapple (NYSE: DPS  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Dr Pepper Snapple.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

0.9%

Fail

 

1-Year Revenue Growth > 12%

2%

Fail

Margins

Gross Margin > 35%

58.2%

Pass

 

Net Margin > 15%

10.5%

Fail

Balance Sheet

Debt to Equity < 50%

119.3%

Fail

 

Current Ratio > 1.3

0.80

Fail

Opportunities

Return on Equity > 15%

27.3%

Pass

Valuation

Normalized P/E < 20

15.60

Pass

Dividends

Current Yield > 2%

3.1%

Pass

 

5-Year Dividend Growth > 10%

31.4%*

Pass

       
 

Total Score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.
*Three-year growth rate.

Since we looked at Dr Pepper Snapple last year, the company has picked up a point, with its dividend history finally being long enough to give it credit for its strong growth. The stock has also done quite well, rising about 25% over the past year.

In an industry where leader Coca-Cola (NYSE: KO  ) has the No. 1 brand in the world, it's hard for Dr Pepper to compete. Yet with its relatively small niche, it has been able to survive despite the fight between Coke and PepsiCo (NYSE: PEP  ) for soda dominance. Between its namesake brands and others such as 7 Up and Sunkist, Dr Pepper Snapple has impressive gross margins that stand up to its larger competitors.

One interesting speculation is whether Dr Pepper might make its syrups available to SodaStream (Nasdaq: SODA  ) customers. Although Coke and Pepsi have relationships with bottlers and distributors to protect, Dr Pepper arguably has more latitude to consider alternatives. It has already teamed up with Green Mountain Coffee Roasters (Nasdaq: GMCR  ) to provide K-Cups for Snapple-branded items.

Recently, though, volumes across the industry have been weak, as a combination of health concerns spurred by New York City's soda ban raise awareness of soft-drink calorie counts. In response, Dr Pepper joined Coke and Pepsi in putting nutritional information on vending machines, taking proactive steps to try to fend off any more burdensome regulatory moves.

For Dr Pepper to improve, it needs those efforts to yield better sales, and the company needs to start applying its profits toward reducing debt. If it can succeed with that, then Dr Pepper could move closer to perfection in the years to come.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Dr Pepper may have its niche, but PepsiCo has filled consumers' bellies for more than a century with both soft drinks and snacks. But recently, the company has left shareholders craving more. With increased competition and loss of market share, many investors wonder if this global snack food and beverage giant is simply fizzling out. Are more bland results ahead for PepsiCo? In The Motley Fool's brand-new premium report on the company, we guide you through everything you need to know about PepsiCo, including the key opportunities and threats facing the company's future. Simply click here now to claim your copy today.

Click here to add Dr Pepper Snapple to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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