Recently, Larry Young, the President and CEO of Dr Pepper Snapple Group Inc. (NYSE:DPS), sold 74,103 shares of the company worth more than $3.5 million. Since the beginning of the year, Dr Pepper Snapple has gained only 7%, under-performing the S&P 500’s gain of nearly 20%. Dr Pepper Snapple does not seem to be expensive at 14.4 times its forward earnings. Is the recent insider sale by the CEO a bearish sign for Dr Pepper Snapple? Let’s take a closer look.
The third-largest player in the CSD market
Dr Pepper Snapple Group Inc. (NYSE:DPS) derived most of its sales, around 89% of the total sales, from the U.S., while its much bigger peers The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) generated most of their sales from outside the U.S. In 2012, Coca-Cola generated more than $19.7 billion, or 41% of its total revenue from the U.S. PepsiCo generated $33.4 billion in the U.S., accounting for around 50.9% of its total 2012 sales. Coca-Cola controls the CSD market with a 42% market share, while PepsiCo ranks second with around 29% market share. Dr Pepper Snapple stays in the third place, accounting for around 16.8% of the market.
In the first half of 2013, Dr Pepper Snapple Group Inc. (NYSE:DPS) reported quite sluggish operating results. Excluding currency effects, its volume experienced a 3% decline while net sales and segment operating profit stayed flat. Year-to-date, its core EPS came in at $1.37 per share. For the full year, the company expects its net sales to increase by around 2%, with the core EPS staying in the range of $3.04 – $3.12, including the negative impact of higher COGS due to packing and ingredient costs.
The cheapest valuation with the highest dividend yield
Dr Pepper Snapple Group Inc. (NYSE:DPS) is the cheapest among the three. The market values the company at 14.4 times its forward earnings. Both The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) have a higher valuation than Dr Pepper Snapple. The market values Coca-Cola at 17.7 times its forward earnings. PepsiCo has a bit higher valuation than Coca-Cola. It is valued at 17.82 times its forward earnings. Income investors would like Dr Pepper Snapple’s juicy dividend yield of 3.30%, with a payout ratio of 46%. Coca-Cola ranks second with 2.80% dividend yield while PepsiCo offers investors a dividend yield of around 2.70%.
Coca-Cola expects to benefit form the large nonalcoholic ready-to-drinks market with 585 million consumers, 37% under the age of 21 and more than 18 million people in the emerging middle class. The company set its 2020 Vision to double its system revenue. Its number of servings is also estimated to grow to more than 3 billion a day, or 3%-4% annual volume growth.
PepsiCo, on the other hand, has been a target of famous activist investor Nelson Peltz. It currently has two different businesses with two different fundamentals: a very profitable snack business and a beverage business with lower profitability. The snack business demands less innovation, whereas the beverage business requires fast moving culture and consumer-led innovation.
Nelson Peltz suggested that PepsiCo should acquire emerging food giant Mondelez, then spin-off the beverage business or at least separate the two businesses. He expects that the merger would be valued at around 8.6 times its 2013 EBITDA, including $3.7 billion in cost synergies and result in margin expansion from Mondelez’s business.
My Foolish take
Dr Pepper Snapple, with the global leading position, the highest dividend yield, and the lowest valuation could fit well in investors’ portfolios. In the long run, the company could deliver a decent return. So do PepsiCo and Coca-Cola. Among the three, I like PepsiCo the most with Nelson Peltz’s activism. He could keep pushing for the separation of the snack business and the beverage business to unlock potential shareholder value.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo.
The article Is This Insider Sale at This Beverage Company a Bearish Sign? originally appeared on Fool.com and is written by Anh HOANG.
Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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