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Investment Overview for Dr Pepper Snapple (NYSE:DPS)
Below are key drivers of Dr Pepper Snapple that present opportunities for upside or downside to the current Trefis price estimate:
North America CSD
- North America CSD EBITDA Margin : EBITDA margins for the North American segment of the company have shown negative growth for the last two years primarily because of high commodity prices. Cost of sales now constitute more than 42% of the revenues. EBITDA margins for 2011 were 21.3%, down 0.9% from the previous year. Should the cost of sales rise further and we see the long term margin falling to 18.5%, we could see a 10% downside to the Trefis price estimate. At the same time, if the cost of sales soften and the company is able to maintain margins similar to those witnessed during 2009 and 2010, we could see a 10% upside to the Trefis price estimate.
Dr Pepper Snapple is the third largest Liquid Refreshment Beverage(LRB) company in the U.S. with further presence in Canada, Mexico and Caribbean. Dr Pepper Snapple is a market leader in the flavored Carbonated Soda Drink (CSD) segment. Besides CSD, the company is also present in juices, Ready-to-Drink (RTD) teas and mineral water, among others. Some of the company's most valuable brands are Dr Pepper, 7UP, Canada Dry, Sunkist, Crush and Snapple.
Dr Pepper Snapple was formed in 2008 as a spin-off from Britain's Cadbury Schweppes. Cadbury Schweppes separated the Americas beverages from its global confectionery business and the entity thus formed was labeled Dr Pepper Snapple.
Dr Pepper Snapple derives its value primarily from its North American CSD operations.
Dr Pepper Snapple's market share in the North American CSD is increasing gradually
While rivals such as Coca Cola and PepsiCo focus on international growth, Dr Pepper Snapple can consolidate and expand its presence in the U.S. and Canada. The company's market share has grown from 15.3% back in 2008 to 16.7% currently. In spite of the market size witnessing negative growth, Dr Pepper Snapple has been able to increase the volume of its CSD operations.
Dr Pepper Snapple has a very limited exposure to emerging markets
Dr Pepper Snapple derives 93% of its revenues from the U.S. and Canada out of which the U.S. constitutes 89%. Only 7% of the revenues are derived from the emerging economies of Mexico and Caribbean. In the U.S., the CSD market size is declining due to consumers predilection for healthier products. Unless the company invests significantly in Mexico and Caribbean, we believe that there is very limited upside to the company's valuation as developed markets are showing signs of saturation.
On the bright side, Dr Pepper Snapple is a market leader in flavored CSDs with a market share of 40% in 2011. Within CSD's, the company primarily operates in the flavors category. The proportion of flavors in the overall CSD market in U.S. has been rising steadily.
Dr Pepper Snapple's bottling agreements with PepsiCo and Coca Cola Co give it a greater foothold in North American markets
Dr Pepper Snapple struck two bottling agreements in 2010, one with Pepsi and the other one with Coca Cola. This contract is to be for a period of twenty years. Under the agreements, Dr Pepper Snapple will provide beverage concentrates of certain brands to Pepsi and Coca Cola who will then bottle, market and distribute it in the U.S. and Canada. The agreements give the company access to areas which have typically had low per-capita consumption of Dr Pepper Snapple brands.
Dr Pepper Snapple received a one time non-refundable fees of $900 million from PepsiCo and $715 million from Coca Cola, which have been recorded as deferred revenues. The agreements provide the company with healthy cash flow as well as add stability to the revenues.
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How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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