Even if you don't own a
SodaStream (Nasdaq: SODA)
, chances are you've heard the name.
These magical machines turn their users into "beverage
engineers." Users can create nearly every imaginable soft drink
(and various other beverages), right from their kitchen. Knowing
that, why would anyone ever buy a soft drink again? Better yet,
why would anyone buy the stock of a soft drink company?
SodaStream's products help people save time and money, while
allowing them to be more environmentally friendly by sending
fewer bottles and cans to landfills. It's easy to see why
SodaStream could spell very bad news for the major beverage
Israeli-based SodaStream is set to take the U.S. by storm, with
its biggest victim set to be
Dr Pepper Snapple (
, which has no international exposure or snack foods to provide
downside protection. Unlike its larger rivals
, Dr Pepper operates only in North America. Even in the U.S., Dr
Pepper is outgunned by Coca-Cola and Pepsi. Together, the two
giants own 60% of the U.S. beverage industry by volume.
Another big headwind for Dr Pepper is the rise of the
health-conscious consumer. This is a challenge for the entire
industry, but more so for Dr Pepper, which has a weak selection
of noncarbonated drinks. Although its key noncarbonated beverages
include Snapple's ready-to-drink teas, Hawaiian Punch and Mott's
apple juice, around 80% of Dr Pepper's sales by volume are
carbonated soft drinks. The real issue here is that SodaStream's
comparable carbonated beverages tend to have fewer calories and
carbs and less sugar.
Yet the biggest headwind for Dr Pepper might be that SodaStream
still has plenty of room to increase its sales in the Americas,
which account for only about 35% of sales. Wall Street analysts
expect SodaStream to increase sales by 50% from 2012 to 2014.
Given Dr Pepper's focus on the U.S. and weak selection of
noncarbonated beverages, the company should underperform
Coca-Cola and Pepsi, but more importantly, it stands to be
squeezed the most by SodaStream's success. Analysts have a
similar sentiment. Dr Pepper is expected to increase earnings per
) at an annualized pace of 7.5% over the next five years.
Despite the company's headwinds, the stock has managed to
continue moving higher over the past three years.
However, from a valuation perspective, DPS is now trading at
half-decade highs and at a price-to-earnings ratio of 15, well
above its five-year average of 9. Dr Pepper's price-to-book ratio
of 3.8 and price-to-sales ratio of 1.5 compare with its five-year
averages of 2.9 and 1.3, respectively. For Dr Pepper investors,
it's tough to find a reason to be excited.
Risks to Consider:
As upside risks, SodaStream could turn out to be a fad, and
Dr Pepper could offset sales declines in its beverage segment
with a strategic acquisition in the snack foods business. If Dr
Pepper manages to break into international markets, it could also
offset potential U.S. sales declines with international growth.
Action to Take -->
Avoid Dr Pepper. On the surface, Dr Pepper does appear cheap
compared with Coca-Cola and Pepsi, but it's cheap for a reason.
The stock has limited growth prospects and will likely face
increasing pressure from SodaStream. Even with an appealing 3.3%
yield, the stock depreciation could more than offset the dividend
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