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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Dr Pepper Snapple Group (NYSE: DPS ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||12.4%*||fail|
|1-Year Revenue Growth > 12%||0.5%||fail|
|Margins||Gross Margin > 35%||60.3%||pass|
|Net Margin > 15%||9.5%||fail|
|Balance Sheet||Debt to Equity < 50%||99.6%||fail|
|Current Ratio > 1.3||1.32||pass|
|Opportunities||Return on Equity > 15%||18.7%||pass|
|Valuation||Normalized P/E < 20||21.11||fail|
|Dividends||Current Yield > 2%||2.6%||pass|
|5-Year Dividend Growth > 10%||NM||--|
|Total Score||4 out of 9|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Dr Pepper Snapple didn't pay a dividend five years ago. Total score = number of passes. *Revenue growth from January 2006.
Dr Pepper Snapple pops open a score of 4, which is neither flat nor overly fizzy. Its middling score reveals some of the competitive pressures in the soft drink industry.
Comparing Dr Pepper Snapple to rivals Coca-Cola (NYSE: KO ) and PepsiCo (NYSE: PEP ) , both of the larger drink makers manage higher net margins, which when combined with their faster growth has led to stronger returns on equity and overall profitability. Ordinarily, you'd expect this to lead to a valuation discount for a player like Dr Pepper Snapple, but you won't find these shares particularly cheap. Moreover, Dr Pepper Snapple hasn't had the same success that fellow niche player Hansen Natural (Nasdaq: HANS ) has found over the years from its natural soda offerings.
The soft-drink industry has been under attack lately by government officials seeking to control obesity. A potential tax could have a major impact on revenue, and if passed on to consumers, might drive them toward cheaper brands like those of National Beverage (Nasdaq: FIZZ ) .
Dr Pepper Snapple has an attractive business, even if it falls short of perfection and some of its competitors. Investors can probably get more fizz, however, by putting their money into other areas.
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.
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