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. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  7. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  8. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  9. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  10. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
COMPANIES IN THIS ARTICLE
Trading Center