Is Dr Pepper Snapple the Perfect Stock?

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.

Factor

What We Want to See

Actual

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.

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.

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.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Hansen Natural is a Motley Fool Rule Breakers selection. Coca-Cola and PepsiCo are Motley Fool Income Investor selections. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Coca-Cola, which is a Motley Fool Inside Value recommendation. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 30, 2010, at 4:20 AM, elliotriley wrote:

    I'm a holder of DPS and enjoyed your article. I'd like to add that anyone considering the company should look at it's management as well as it's growth prospect. The management is excellent in my opinion with the CEO having built himself up to his position today (all with experience in this industry). DPS's products are currently stuck mostly in the America's, which concerns many. However, I believe in the product's that they're selling and think that once they begin to expand out to China and other new markets they'll grow pretty quickly. Their revival of Snapple can testify to their ability when the goal is set. Do I think it will shoot up in the short term? No. But... I think that over the long-term, it's got plenty of room to grow (or be bought out). I'm an optimist though who also loves their products.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1378361, ~/Articles/ArticleHandler.aspx, 10/31/2014 1:11:30 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement