Shares of Dr Pepper Snapple (NYSE:DPS) jumped considerably after a favorable earnings report in late March. Even with the run-up, the shares still trade at about 10x earnings, which looks like a good deal considering the company owns a number of leading soft-drink and other beverage brands in North America. However, these aren't the only factors to consider.

IN PICTURES:
Vacation Savings Tips

Current Results
Fourth-quarter sales were essentially flat, coming in at $1.4 billion as the loss of distribution rights for Glaceau, which was recently acquired by Coca-Cola, and Hansen Natural (Nasdaq:HANS) products were offset by a 1% increase in sales volume and price increases. Overall, higher cost-consciousness by consumers contributed to a predictable outcome in Dr Pepper Snapple's product volume trends. Volumes fell 7% for the premium Snapple brand, while more affordable carbonated soft-drink brands such as 7UP, Sunkist, A&W and Canada Dry (the company's "Core 4" brands) posted flat volumes. The "value-priced", non-carbonated Hawaiian Punch brand witnessed a strong 19% increase.

Bottom-line trends were difficult to discern as several one-time, non-cash charges pushed Q4 and full-year earnings into negative territory, but full-year cash flow from operations increased 17.6% to $709 million. Subtracting out $304 million in capital expenditures resulted in free cash flow (FCF) of $405 million, or $1.59 per share based on year-end diluted shares outstanding. Most of this was used to pay down the company's heavy debt load. (Read The Essentials Of Cash Flow to learn how to tune out the accounting noise and see whether a company is generating what it needs to sustain itself.)

Outlook
For the coming year, management expects sales to grow about 2 percent when excluding the loss of the Hansen product distribution, and it projects earnings between $1.59 and $1.67 per share. Again, free cash flow will be targeted on debt reduction, which stood at $3.5 billion as of year end.

Bottom Line
Dr Pepper Snapple's core brands are known for stable sales and profits, which is an enviable position to be in during economic downturns. Its stock is also very reasonably valued on a forward P/E and trailing P/FCF basis. However, debt will take many years to pay down, and the firm was left with mature brands and markets when it was spun off from Cadbury (NYSE:CBY) last May. And unlike Coca-Cola (NYSE:KO) or PepsiCo (NYSE:PEP), Dr Pepper Snapple owns many of its bottling and distribution businesses. These functions tie up capital and leave less to return to shareholders.

In other words, despite the favorable valuation and stable business outlook, Dr Pepper Snapple has too many obstacles to overcome to consider adding it to my stock portfolio.

Check out our Investment Valuation Ratios Tutorial to learn what to look for when picking your stocks.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!