Thursday, March 20, 2014

U.S. Beverage Valuation Wrap Up

Throughout February we had fourth quarter and full year earnings releases from the three major players in the non-alcoholic beverage industry. As the new data points rolled in I figured it was time to update the valuations on the Coca-Cola Company (KO), Dr. Pepper Snapple Group, Inc. (DPS) and PepsiCo. Inc. (PEP). Each company struggled during 2013 with declining sales volumes in the United States, but were also able to give owners a dividend increase. I want to take a look at a few metrics to see which company might have the best relative valuation out of the three.

As part of my quantitative analysis for any company that I want to invest in, I calculate a target entry price. The target entry price is based off several valuation methods including discounted earnings, Graham Number, high dividend yield, low P/E ratio, low P/S ratio, Gordon Growth model and the dividend discount model. The idea is to try and come up with a target entry price as well as fair value and overvalue price points. My partner and I are currently developing analysis tools and we hope to get the first set of tools out over the next month.

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9 comments:

  1. Over the past couple months I added to both PEP and KO. Still not too keen on DPS. I personally don't really like DPS products, but that wouldn't stop me from buying the stock. What bothers me is that the company's fortunes rely on the United States alone. I'd rather have access to other countries where populations and incomes might grow faster. I promise you people drink Coke & Pepsi in other countries I've visited in Europe and Asia. Heck I drank KO branded bottled water (Diamond, plus a second brand I can't remember) and energy drinks (Burn) while in S. Korea last month... I don't know if KO receives royalties for putting their logo on the bottle or what, but those bottled waters aren't listed on their site.

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    1. CI,

      I'm looking to add a bit more to KO but I've been adding PEP pretty heavily. I have the same feelings/concerns about DPS, although I do like their products. PEP is actually the drink I like least out of the three namesake products but PEP has the huge snack food division that I love.

      Thanks for stopping by!

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  2. Seriousaly I realy appreciate from your blog posting and design. I suggest to all, you should watch daily this blog. Thanks for share with us.
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    ReplyDelete
  3. Excellent analysis and it's always great to read you on SA. Your article on PEP in February was also great. I'm hoping to join you as a shareholder soon! Can't wait for the tools you're developing, must learn the secrets to entry prices!! :)

    All my best,
    Ryan

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    1. Ryan,

      I think PEP is at a good price if you're looking to initiate a position, not the best valuation because it wasn't that long ago you could buy it around $76/77. I missed out on those prices but got to average down twice. I'm glad you're liking the SA articles and I hope to get another one or two up this week.

      Thanks for stopping by!

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  4. Wow, I'm surprised the PEG ratio's for all the beverage groups are so high. There must be fairly bleak assessments of their growth prospects by analysts going out over the next 3-5yrs.

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    1. Integrator,

      I agree the PEG's all seem really high but I imagine that in 3-5 years the actual PEG's will look better. There's a lot of doom and gloom around all three because of the US/Developed world declines in CSDs. I expect the relatively meager growth projections to be beaten making them look better in hindsight, although I wouldn't expect trailing PEG's to be down in the 1 range because that would imply a doubling of the growth rates. I like the stable nature of their businesses though which is the role they should play in a portfolio. If you're expecting 15% annual growth you'll be highly disappointed.

      Thanks for stopping by!

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  5. I recently read an article on Pepsico today. I plan do to some deep analysis over the coming weeks.

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    1. Marvin,

      I really like PEP, mainly for their snack business. Let me know what you find out.

      Thanks for stopping by!

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