Consumer Staples Dr Pepper Snapple Group, Inc. · PDF file2. After we analyzed Dr Pepper Snapple by integrating the U.S. economy, the beverage industry, and its company specific performance,

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Krause Fund Research

Spring 2015

Consumer Staples Dr Pepper Snapple Group, Inc. (NYSE: DPS)

Recommendation: HOLD

Analysts

Di Yan

[email protected]

Leslie Wille

[email protected]

Yuqing Fang

[email protected]

Company Overview

Dr Pepper Snapple Group, Inc. (NYSE: DPS) is a leading

integrated brand owner, manufacturer, and distributor of non-

alcoholic beverages in the United States, Canada, and Mexico.

It is headquartered in Plano, Texas. In 2008, Dr Pepper Snapple

was spun off from its parent company Cadbury Schweppes and

started being publicly traded in the U.S. Dr Pepper Snapple has

three business segments including Beverage Concentrates,

Packaged Beverages, and Latin America Beverages. The

Packaged Beverages segment has always been the chief

revenue producer for the company, which created 71% of

revenues in 2014.

Stock Performance Highlights

Market Capitalization $14.85B

Share Outstanding 192.96M

52 Week Range $52.33 – $81.45

Beta Value 0.60

Average Daily Volume 1.03M

Key Statistics

Book Value Per Share $11.89

EPS (ttm) $3.56

Dividend Yield 2.50%

Dividend Payout $1.92

Price/Earnings (ttm) 21.64

Price/Sales (ttm) 2.87

Price/Book (mrq) 12.57

Financial Ratios

Return on Assets (ttm) 8.94%

Return on Equity (ttm) 30.76%

Operation Margin (ttm) 19.25%

Current Ratio 1.17

Debt to Equity 1.1

Current Price $77.79

Target Price $79.95

DPS Is Worth Waiting!

Dr Pepper Snapple has stable revenue growth each year,

with an average increase of 2% from 2010-2014. Since the U.S.

economy is healthy and experiencing an increasing demand in

the consumer staple sector due to the growing population

nationwide, we expect a 1.27% increase in net sales in 2015. In

addition, due to volatile commodity prices in recent months, we

expect approximately a 1% decrease in the proportion of the cost

of goods sold in sales in 2015.

Growth for beverage industry has been sluggish in recent

years, thus we merely estimate a 1.4% continuing value growth

rate for Dr Pepper Snapple after 2019.

Since consumers are increasingly concerned about health

and wellness, they are changing their preferences towards much

healthier drinks. The demand for carbonated soft drinks will

decrease as consumers have shifted towards non-carbonated

beverages such as water, ready-to-drink teas, and sports drinks.

Therefore, if Dr Pepper Snapple cannot effectively anticipate the

changes in consumers’ preferences and then quickly develop

new products in response, its sales could suffer. In addition,

developing and launching new products can be risky and

expensive, and some of its competitors may be better able to

respond to these changes, either of which could negatively affect

its business and financial performance.i

As environmental issues become more of a concern, the

effects that large amounts of plastics and other materials used for

packaged beverages have on it will harm the beverage industry.

12-Month Stock Performance (S&P 500 in Red)

Figuee1: Source: Yahoo! Finance

AprilApril 21, 2015

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After we analyzed Dr Pepper Snapple by integrating the U.S.

economy, the beverage industry, and its company specific

performance, we expect a fair value of $79.95 for Dr Pepper

Snapple in 2015, which is very similar to the current stock price.

Therefore, we recommend holding Dr Pepper Snapple. The U.S.

economy is expected to grow and continue to be healthy in the

short term. However, since the beverage market in the U.S. is

already mature, the sluggish growth of the beverage industry in

the U.S. slows down the growth of companies within it.

Therefore, it is better for Dr Pepper Snapple to seek overseas

opportunities, although there are risks associated with such

expansion like differences in currency rates and changes in

governmental policies. Although disposable income is expected

to increase, consumer spending has still been soft in recent

months.ii Therefore, we suggest that investors can still wait and

see how Dr Pepper Snapple reacts to the risks it exposes and how

it creates its own strategic advantage over other companies.

Gross Domestic Product

Real Gross Domestic Product is a vital and commonly used

determinant to measure the economic performance of a country.

The Real GDP is defined as the nominal GDP adjusted by the

inflation rate that reflects the market value of goods and services

measured annually.iii Since nearly two-thirds of GDP is driven

by individual’s consumption, it is an important indicator of the

consumer staples sector.

According to the graph below by the Federal Reserve Bank of St.

Louis, the U.S. Real GDP has historically remained in an upward

trend except during the recessions.

Figure2: Source: Federal Reserve Bank of St. Louisiv

Below is a chart showing the percentage change of Real Gross

Domestic Product. As seen in the chart, the Real GDP increased

by 2.5% on average in 2014, with -2.1%, 4.6%, 5.0%, and 2.2%

in quarters 1-4 respectively.

Figure 3: Source: Federal Reserve Bank of St. Louisv

Based on the projections of authority institutions, including the

International Monetary Fund, the European Commission, and the

Federal Reserve, the Real GDP in 2015 will increase

approximately 3.15%, and 3.06% in 2016.vi Furthermore, new

job openings will give more opportunities to people and boost

the economy. However, the impact of the federal funds rate

adjustment in 2015 on stocks, along with the economic

slowdown in the Eurozone, will also slow down the growth of

the U.S. GDP. In addition, the decrease the CCI in January and

soft spending in February indicate that people prefer saving more

than spending. Therefore, we predict that the Real GDP will

increase by 2.6%, as it did in the last quarter of 2014, within the

next six months. We also estimate that the Real GDP will

increase approximately 3.0% in the next 2-3 years.

Unemployment Rate

We think it is an important indicator because unemployment

rates can reflect the well-being of an economy in a country. For

example, during the 2007-2009 recession, the unemployment

rate was remarkably high and reached 10% in 2009.

Alternatively, when an economy stays healthy, it experiences a

low unemployment rate.

As seen in the graph below by the Bureau of Labor Statistics, the

unemployment rate gradually recovered to a lower rate after the

recession in 2008 and 2009.vii

Figure 4: Source: Federal Reserve Bank of St. Louisviii

Since 2010, the unemployment rate has continued to decrease by

an average of 0.1% each year. Additionally, the unemployment

rate decreased to 5.5% by February this year and held steady at

5.5% in March. Based on the projections of International

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Monetary Fund, European Commission, and the Federal Reserve,

the unemployment rate in 2015 will be approximately 5.6%, and

5.4% in 2016. ix Referring to the news posted on the Board of

Governors of the Federal Reserve System, “labor market

conditions have improved further with strong job gains and a

lower unemployment rate.” Hence, we predict that the

unemployment rate will probably not change a lot in the short

term, it will only decrease by 2%, as compared to 5.8% in the

fourth quarter of 2014 since jobless people still need time to find

work. In the long term, our group predicts that the

unemployment rate will remain low and stay around 5.5%.x

We believe that the low unemployment rate will have positive

impacts on consumer staple sectors. Lower unemployment rate

can indicate an increase in purchasing power of customers, and

thus promotes consumer spending.

Consumer Price Index

The CPI is important for understanding the consumer staples

industry because it reflects changes in price due to rising costs of

food, beverages, drugs, personal and household items, tobacco,

and alcohol.xi The CPI has risen at a relatively steady rate for the

last 10 years, due in part to a rise in food and beverage prices.

The price of meat, grains, fruits and vegetables, and dairy

products have increased in the last several years due to droughts,

disease among animals, extremely cold weather, and a citrus

greening disease in Florida. In general, the price of all foods and

beverages using ingredients from these categories were affected

by the calamities. This is due to the fact that the price of products

not directly affected rose when more people started to turn to

cheaper options, thusly causing them to go into higher demand.xii

Since the minimum wage has also increased substantially in the

last ten years, prices within the beverage industry have increased

because the average American can afford to pay higher prices for

their drinks.xiii

Below is a graph representing the steady rise in the CPI from

1990-2014.xiv

Figure 5: Source: Federal Reserve Bank of St. Louis

CPI increased 2.04% last year and 1.93% on average in the last

three years. xv So, the inflation rate is steadily increasing.

We believe the CPI for the consumer staples industry will

continue to steadily increase by about 2% in the short term, and

by 2.2% in the next two-three years. We believe it will be very

similar to the national expected inflation rate because there will

only be a small level of growth within the industry. Although an

increase in the minimum wage may cause the CPI to decrease to

some degree, it will likely be offset by increases in the price of

consumer goods. xvi , xvii In conclusion, an increasing CPI will

cause consumers to have less confidence in the consumer staples

industry because they will have less purchasing power.

Interest Rate

The federal funds rate is the interest rate at which banks and

other depository institutions lend money to each other.

Increasing the federal funds rate will decrease the supply of

money and increase short-term interest rates, and vice versa.xviii

Therefore, the federal funds rate can be seen as a benchmark for

analyzing interest rates in financial markets. The federal funds

rate has been at a low level of 0.25% for more than 4 years after

the 2008 financial crisis.

Figure 6: Source: Trading Economics | U.S. Bureau of Economic Analysis

According to the data retrieved in Brankrate (n.d.), the prime rate

has been 3.25% for a year. Therefore, we believe that within the

next 6 months, the prime loan rate will remain unchanged or

change very little until the federal funds rate is adjusted to some

extent. We are more likely to expect the interest rate at the end of

June 2015 to be 3.20%-3.30%. xix Thus, companies in the

consumer staples sector still can save a lot in cost of debt, and

this will give rise to a good stock performance within 6 months.

This is due to the fact that a lower cost of debt will result in

lower interest expenses and more free cash flows to raise

investors’ estimate for the company’s stock price.

According to the long-term forecast from Mortgage-X, the prime

loan interest rate will increase to approximately 4.00% at the end

of 2015. We expect the interest rate to achieve at least 4.75% in

the next 2-3 years.xx

Demographics

The population in America is expected to increase by another

100 million people by 2050. The number of people aged 65 and

older are expected to increase from 13%-20% by the middle of

the century, but the working class is estimated to increase by

42%. Birth rates are also expected to escalate causing a small

population bubble. This is because the children of the youngest

baby boomers will begin to have children of their own, and the

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grandchildren of the early baby boomers will begin to have

babies as well. Birth rates in the U.S. have been higher in the last

decade than they have in the last 45 years.xxi

Below is a chart representing expected population growth in the

United States between 2010 and 2050.xxii

Figure 7: Source: The American Century

Greater amounts of consumer goods, including staple items such

beverages, will need to be produced to support such large

population growth. This will cause the consumer staples industry

to grow, but it will be at a very gradual rate as the population

expands throughout the next 35 years.xxiiiWe expect the industry

to grow by approximately 1.5-2% in the next 2-3 years due the

population boom and the rise in Real GDP.

Capital Market Outlook

The market outlook for the beverage industry is positive. Real

GDP is expected to increase by 3% in the short term, giving rise

to a healthier economy. Unemployment is expected to decrease

by .2%, which will also give a boost to consumer staples

industries and increase purchasing power. CPI is anticipated to

increase by 2%, and interest rates will remain low. We believe

that the positive changes in Real GDP and unemployment rates

will outweigh the effects of a rising CPI and low interest rates on

the industry. The population is also expected to grow

considerably in the next 20 years, which will raise demand for

staple items.xxiv For these reasons, we estimate that the beverage

industry will grow by approximately 1.4% in the next 5 years.

We believe it will perform better in 5 years than in the next year

because an increase in population and employment rates will take

time.

The table below demonstrates how sectors within the consumer

staples industry have performed relative to each other in the S&P

500 in the last 5 years. In general, those that have performed the

best are food and staples retailing, tobacco, beverages, and food

products.xxv

Figure 8: Source: Fidelity, “Consumer Staples”

Industry Overview

The non-alcoholic beverage industry in the consumer staples

sector covers eight main product lines: carbonated soft drinks,

sports beverages, bottled water, energy drinks, fruit drinks,

value-added water, ready-to-drink tea, ready-to-drink coffee.xxvi

Figure 9: Source: Beverage Industry Analysis 2014

Major players, including Dr Pepper Snapple, Coca-Cola,

PepsiCo, Monster, and National Beverage, in this mature

industry compete with each other intensely. However, the

beverage industry is quite a defensive industry that it is not

sensitive to the changes in economic and financial environment.

Companies in this industry create revenues simply by

manufacturing beverages, though some companies, like Monster,

will outsource their manufacturing process and earn the margins

from such.

Industry Trend and Recent Developments

Based on the Beverage Industry Analysis in 2014, people tend to

choose more healthy drinks. For example, the consumption of

energy drinks, soft drinks, and high-caloric coffee has been

falling, while the price of bottled water has remained

competitive. xxvii According to respondents of the beverage

industry’s annual New Product Development Outlook survey,

51% of companies plan to launch new products in 2015. In

addition, “high protein” and “natural” are most likely to be the

latest trends for 2015.xxviii Another trend is a shift in consumers’

preference towards non-carbonated beverages like ready-to drink

tea and coffee and bottled water.xxix

The most recent trends in the beverage industry indicate a

preference change of people towards healthier beverages, which

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is a positive sign for the whole consumer staple industries since

healthier beverages are usually more expensive than carbonated

soft drinks. However, since people are more concerned about

environmental issues, using more eco-friendly bottles and cans

will be a future trend in the beverage industry.

Competitive Landscape

The beverage industry within the U.S. is somewhat mature, and

has three major players, the Coca-Cola Company, PepsiCo Inc.,

and Dr. Pepper Snapple Group. The Coca-Cola owns

approximately 29.5% of the soda market within the U.S., while

PepsiCo owns an estimated 20.3%, and Dr Pepper Snapple

Group controls 9.9%.xxx Each has reached economies of scale

and which makes it difficult for new entrants to come into the

market. The main threat of new entrants exists overseas, where

there is expected to be a large amount of growth in the industry

in the long term.xxxi

Growth in store brands in the beverage industry has remained

stagnant in the last 2-3 years because they have a hard time

entering the market due to market domination by the major

players in the industry. This is true in the beverage industry

because PepsiCo Inc. and the Coca-Cola Company have a large

amount of global sales and spend a huge amount of time on

marketing and innovation.xxxii In addition, the average consumer

also is more willing to spend more on staple items, like

beverages, as the economy recovers from the recession of 2008

because they have a greater amount of purchasing power. So

they are more likely to trade up from store brand products to

brand name products. xxxiii For these reasons, we expect Dr

Pepper Snapple Group sales to increase by 1.27%-1.81% in the

next two years.

Companies within the beverages industry are expected to achieve

higher product margins and will therefore earn higher profits in

the short term as the price of beverages rise due to inflation.xxxiv

Although commodity costs have been volatile, net profits are

still expected to increase for major companies in the industry due

to their ability to hedge. xxxv This is demonstrated in the

forecasted income statement below; we expect Dr Pepper

Snapple Group’s net earnings to increase by 0.83 % on average,

over the next 5 years.

Although the market for soft drinks is expected to decrease in the

next five years because of rising health awareness among

consumers, each of major manufacturers’ sales are expected to

remain high due to refreshed product lines and an increase in “all

natural products.xxxvi So, PepsiCo Inc., the Coca-Cola Company,

and Dr. Pepper Snapple Group, will likely continue to be major

players within the industry.xxxvii

Key Investment Positives and Negatives

The positive news for the beverage market is that the population

is expanding both nationally and globally. Hence, there will be

an increased demand for beverages worldwide.xxxviii Dr Pepper

Snapple will target fast growing population segments, such as

the Hispanic community in the U.S., to drive its market growth

since it has already been a leader of flavored CSD beverage

markets in the U.S. In addition, Dr Pepper Snapple will focus to

grow its brands by continuously providing new solutions to meet

consumers' changing preferences and needs. Its solutions include

new and reformulated products, improved packaging design, and

pricing and enhanced availability. xxxix According to Beverage

Industry Magazine, Dr Pepper Snapple announced a number of

new products for 2015, including Snapple Whoa-Conut, Snapple

Straight Up, Snapple Lady LiberTea, and Mott’s Tropical Ba-

Na-Na. About 54% of the company’s innovation pipeline

focuses on health and wellness products across the non-

carbonated as well as carbonated beverage categories. xl

However, people are becoming more concerned about the

environment in general. The effects that large amounts of

plastics and other materials used for packaged beverages have on

the environment will harm the beverage industry. xli

Catalysts for Growth/Change

Domestic Market: The U.S. population has grown by0.73% in

the last 3 years. xlii This will raise the demand for beverages,

which will keep it healthy.xliii

Environmental Issues: Environmental issues are a concern

for the beverages industry since some materials used to

package beverages take decades to degrade and pollute the

soil. However, the increased use of green materials for

packaged beverages, such as recycled bottles and boxes, can

help mitigate these environmental concerns.xliv

Business Description

Business Segments and Brand Portfolioxlv

Dr Pepper Snapple

operates in three

business segments.

The Packaged

Beverages segment

produced most of

the company’s

revenues in 2014.

Beverage Concentrates: The major products in this segment are

carbonated soft drinks (CSDs), which owned 38.8% market

share in the U.S. Although PepsiCo and Coca-Cola are the two

largest competitors for Dr Pepper Snapple in the packaged

beverages segment, they are its two largest customers in the

beverage concentrates segment. They created 27% and 21% of

Dr Pepper Snapple’s segment revenues in 2014 respectively.

Packaged Beverages: Dr Pepper Snapple manufactures and

distributes not only its own brands, but also third-party owned

Figure 9: Source: NetAdvantage

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brands and some private label beverages in the U.S. and Canada.

Wal-Mart was the largest customer, which produced 16% of net

sales in this segment in 2014.

Latin America Beverages: In 2014, this segment created net

revenues of $532 million, 91% of which was from Mexican

operations. Carbonated mineral water, vegetable juice, and

grapefruit flavored CSDs were the most popular products in this

segment.

Dr Pepper Snapple offers flavored carbonated soft drinks (CSDs)

and non-carbonated beverages (NCBs), including ready-to-drink

teas, juices, juice drinks, water, and mixers. The company sells

its flavored CSD products primarily under the brands Dr Pepper,

Canada Dry, 7UP, A&W, Crush, Sunkist soda, Schweppes, RC

Cola, and Squirt, and NCB products primarily under the

Hawaiian Punch, Snapple, Mott's, and Clamato brands. Kraft’s

business is mainly based on collaboration with bottlers,

distributors, and retailers.xlvi

Figure 10: Source: Dr Pepper Snapple 2014 10-K

Corporate Strategyxlvii

Enhancement of leading brands: Dr Pepper Snapple will

continue to invest more in leading products, which created the

most revenues and built reputation for the company, to upgrade

the market awareness and boost company profits. Dr Pepper

Snapple will mainly focus on innovating a new marketing

strategy, advancing distribution systems, and going along with

consumer trends to enhance of its leading brands.

Rapid Continuous Improvement (RCI) initiative: In 2011, Dr

Pepper Snapple launched the Rapid Continuous Improvement

(RCI) initiative, which utilized the Lean and Six Sigma methods

to improvement operation efficiency. RCI has improved the

company’s cash productivity by millions of dollars and has

lowered its capital expenditure requirements as well.

Route-to-Market: Investment in Information Technology allows

Dr Pepper Snapple to chase the most recent market data and

remain the top choice for its third-party partners, including

bottling and delivering companies.

Increase Presence in Key Channels: Dr Pepper Snapple aims to

increase its supplies in key channels, including convenience

stores, vending machines, and other independent retail stores, to

improve awareness and enlarge the consumer basis.

Life Cycle

According to the financial data retrieved from NetAdvantage and

Dr Pepper Snapple’s 10-K report, we noticed that its investing

cash flow and financing cash flow were l negative from 2010 to

2014, which indicated that cash flow was used to update capitals

and repay long-term debt. Furthermore, both net sales and net

income fluctuated over a narrow range within 5 years. Therefore,

we believe that Dr Pepper Snapple is currently in the maturity

stage.xlviii

Figure 11: Source: Dr Pepper Snapple 10-K Reports

Financial Summary

Dr Pepper Snapple had stably increasing revenues from 2011 to

2013 and achieved significant progress in revenues during 2014.

Dr Pepper Snapple also realized 12.66% increase in its net

income, compared with an average increase of 1.01% in 2013

and 2012. The decent growth rates of revenues and net income as

well as EPS probably can be attributed to the company’s

emphasis on financial leverage. Dr Pepper Snapple held more

long-term debt in 2014 than it did in the previous three years;

however, its annual capital expenditures have been decreasing

year by year. Besides, Dr Pepper Snapple’s dividend payout also

has been going up since 2011, which is favored by investors.

Overall, Dr Pepper Snapple’s financial performance is

satisfactory in 2014 mainly because of its significant rise in sales

and profitability, and its investor preferred dividend payout

policy.

Figure 12: Source: Yahoo! Finance

Analysis of Recent Earnings Releases

Dr Pepper Snapple Group reported that EPS were $3.59 in 2014.

Compared with last year, EPS increased 17% due to a decrease

in stock shares. Net sales increased 3% in the fourth quarter and

2% in the year. In addition, net income increased by almost 13%

because of the higher net sales, savings on cost of sales and

savings on pension plan withdrawals. The main products that

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contribute to the sales of Dr Pepper Snapple are beverage

concentrates, packaged beverages, and Latin America beverages.

Among these products, packaged beverages are sold the most

annually. However, Latin America beverages achieved the

highest sales volume increase and the highest sales percentage

increase.xlix

On December 31, 2015, Dr Pepper Snapple estimated that net

sales could be up approximately 1% as compared to the year

ending December 31, 2014. Commodity costs for the year

ending December 31, 2015, could be down approximately 1% on

a constant volume/mix basis as compared to the year ending

December 31, 2014. l

Our group forecasts that the net sales of Dr Pepper Snapple in

2015 will increase by 1.27% compared to the year 2014. Since

commodity prices are expected to have a high volatility in 2015

and Dr Pepper Snapple also faces an increase in logistics and

employee costs from third-party carriers, we expect a lower cost

of goods sold for Dr Pepper Snapple in 2015 with higher selling,

general, and administration costs.li Due to the favorable impact

of fair value hedges and the repayment of 6.12% senior

unsecured notes in May 2013, interest expense decreased

approximately 11% in 2014, compared with the year prior.

Therefore, our group expects that the interest expense will

remain low in 2015.

Products and Markets

Dr Pepper Snapple produces non-alcoholic beverages including

various carbonated soft drinks, lemonade, bottled water, juice,

tea, root beer, mixes, energy drinks, ginger ale, and chocolate

drinks. Its largest market segment is carbonated soft drinks with

a 20.7% market share. lii

As can be seen in the chart above, most of Dr Pepper Snapple’s

revenue is generated from packaged beverages, and sales within

the U.S. liii The beverage concentrates segment is namely

comprised of beverages with lots of sweeteners, artificial syrups,

and flavorings. The Latin America segment includes carbonated

mineral water, fruit and vegetable flavored carbonated soft

drinks, juice, and bottled water. The packaged beverage segment

includes any products that do not fall into either of these

categories, and is namely composed of carbonated soft drinks,

along with some non-carbonated beverages such as juice.

We expect packaged beverage revenues to grow 3.73% in the

next 5 years due to the steady amount of growth expected for the

beverages industry. We do not anticipate it to be as high as the

industry however, because consumers are becoming increasingly

conscious of the environment and unnecessary amounts of

packaging is unfavorable. Revenue from the beverage

concentrates segment is expected to decrease by 1.03% by 2019.

This is because demand for sugary drinks is decreasing due to a

rising level of health awareness among consumers. liv Latin

America beverage revenues are estimated to increase by 9.10%

by 2019 because most of the products in this segment are

healthier than in the other segments, and demand for them is

expected to rise due to consumers’ rising health awareness. lv

Figure 13: Source: MarketLine Advantage

In 2013, 88% of Dr Pepper Snapple Group’s net sales were from

the U.S., 8% were from Mexico, and 4% were from Canada.

49% of Dr Pepper Snapple’s total products were distributed and

sold in the U.S. in 2013. lvi

Dr Pepper Snapple sells to two main types of customers, bottlers

and distributors or retailers. Their largest customer in retail is

Wal-Mart, which accounts for about 12% of their net sales. lviiPepsiCo also had 12% of its sales from Wal-Mart in 2014, and

the Coca-Cola Company had 15%. lviii , lix Dr Pepper Snapple

Group is also working to strengthen brand awareness form

product extensions to encompass new trends emerging within the

beverages industry, such as drinks with less sugar and lipids. lxIn

order to address changing consumers’ needs, they often develop

shopper programs, reformulate their products, and change their

packaging designs. lxi

Products and Distribution Dr Pepper Snapple sells carbonated soft drinks ("CSDs") and

non-carbonated beverages ("NCBs") not only in the U.S, but also

in the Mexico, Canada and the Caribbean. Dr Pepper Snapple

distributes different products to accommodate and satisfy each of

the four markets.

Manufacturing process and distribution: Dr Pepper Snapple

operates 20 manufacturing facilities across the U.S. and

Mexico. They produce 90% of their products and manufacture

beverages in a variety of packaging materials while the

remaining 10% of its products are manufactured by third parties.

Dr Pepper Snapple also has a very effective distribution network

since 113 principal distribution centers and warehouses are

geographically dispersed to ensure products meet consumer

demand. lxii

Raw materials costs and suppliers: Dr Pepper Snapple primarily

uses aluminum cans and ends, glass bottles, PET bottles and

caps, paper products, sweeteners, juice, fruit, water and other

ingredients to make products. The cost of such raw materials can

fluctuate substantially. In addition, the company is significantly

impacted by the changes in fuel costs due to the large truck fleet

operated in its distribution businesses. Dr Pepper Snapple has

contracts with a relatively small number of suppliers. So, it keeps

the use of commodities forward contracts and supplier pricing

agreements to mitigate the exposure to volatility in the prices of

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certain commodities and hedge the risk of adverse movements in

commodity prices. lxiii Due to the impact of a 10% change (up or

down) in market prices for these commodities where the risk of

adverse movements has not been hedged in December 2014, Dr

Pepper Snapple estimates there to be an increase or decrease of

approximately $21 million to their income from operations for

the year ending December 31, 2015. lxiv

Competition

Dr Pepper Snapple is primarily involved in the non-alcoholic

beverages industry, which is dominated by two giants – Coca-

Cola and PepsiCo, which occupy almost 75% market share.lxv Dr

Pepper Snapple ranked third in the industry, and other key

beverage producers, including Monster Beverage and National

Beverage, also play a crucial role in making this industry highly

competitive by inventing new ingredients and flavors and

creating innovative marketing ideas continuously.

The table below shows financial ratios and comparative values of

the leading companies within the beverage industry compared to

Dr Pepper Snapple. Dr Pepper Snapple has the lowest P/E ratio

among its competitors, implying that Dr Pepper Snapple might

be less attractive to investors. Monster has the highest P/E ratio

compared with other companies. Even PepsiCo and Coca-Cola,

both of which already have very large market capitalizations and

are the most stable and mature companies in this industry, have

lower P/E ratios than Monster. Dr Pepper Snapple also has a

moderate leverage rate (D/E), moderate ROE, and low current

ratio compared with its competitors. Although its EPS ratio is the

second highest among its competitors, Dr Pepper Snapple’s high

EPS might be attributed to the repurchase of stock shares, which

reduces its outstanding shares compared to its competitors.


Approximately 64% and 17% of Coca-Cola and PepsiCo’s

valuation, respectively, comes from carbonated soft drinks

(CSDs), and 80% of Dr Pepper’s net volume sales are CSDs. In

addition, the domestic market is also a major contributor to those

three companies’ net sales. Therefore, the recent trend in the

deceasing demand for soft drinks in the U.S. will be a risk for all

three companies. The table below shows that the volume and unit

price changed for the 3 largest companies in the carbonated soft

drink industry. Dr Pepper has not been as aggressive as its peers

in terms of price increases. Thus, the total dollar sales of Dr

Pepper Snapple have grown by 0.7%.lxvi

Figure 15: Source: Forbes

In addition to financial performance, we noticed that Dr Pepper

Snapple did have a decent stock performance the last year.

Below is the graph of its one-year stock price change. Before

Coca-Cola announced the purchase of a 17% stake of Monster,

which seemed like a win-win transaction for both companies,lxvii

Dr Pepper Snapple was still the company that maintained the

greatest percentage increase in stock price. Overall, under the

pressure of two giants, Coca-Cola and PepsiCo, and the dark

horse Monster, Dr Pepper Snapple actually performed

satisfactorily in the last 12 months.


Other Topics

Since 12% of Dr Pepper Snapple Group’s sales are in Canada

and Mexico, the value of the U.S. dollar relative to each

country’s respective currency affects Dr Pepper Snapple’s

earnings.lxviii Currently the value of the U.S. dollar is greater than

both the Canadian dollar and the peso, and it is expected to

remain strong. lxix Unless the value of the Canadian dollar and

the peso increase relative to the U.S dollar, Dr Pepper Snapple

may experience decreased revenue in the short term.

Dr Pepper Snapple owns approximately 2,300 trademarks in the

U.S., Mexico, and Canada, with trademarks for most of its

brands in the U.S. In many other countries, trademarks to some

of their leading brands are owned by other companies or

competitors such as Coca-Cola.lxx

Catalysts for growth/change

Since environmental issues have become more important in

recent years, we expect Dr Pepper Snapple to focus more on

corporate social responsibility, which includes caring more for

the environment, in 2015.

Emerging markets are another business opportunity for Dr

Pepper Snapple since DPS does not have any business in

emerging markets. However, there are also risks associated with

such expansion like differences in currency rates and changes in

governmental policies.

9

S.W.O.T. Analysis

Strengths

Strong brand portfolio: Dr Pepper Snapple covers a wide range

of non-alcoholic beverage brands. It is the #1 flavored CSD

company in the U.S., and is the only major beverage concentrate

company with year-over-year market share growth in the CSD

market in the last five years. Additionally, Dr Pepper, which is

the company’s largest brand, is the second favorite flavored CSD

in the U.S. Dr Pepper Snapple is also continuously launching

innovations and brand extensions for almost 83% of its

brands.lxxi

Broad geographic manufacturing and distribution coverage: As

of December 31, 2013, Dr Pepper Snapple had 18 manufacturing

facilities and 113 principal distribution centers and warehouse

facilities in the U.S., as well as two manufacturing facilities and

eight principal distribution centers and warehouse facilities in

Mexico. In addition, Dr Pepper Snapple’s warehouses are

generally located at or near bottling plants and geographically

dispersed to ensure the products are available to meet consumer

demand.lxxii

Strong operating margins and stable cash flows: The breadth of

Dr Pepper Snapple’s brand portfolio has enabled it to generate

strong operating margins, which have delivered stable cash

flows. These cash flows enable it to consider a variety of

alternatives, such as investing in business, repurchasing shares of

common stock, paying dividends to stockholders and reducing

debt.lxxiii

Weaknesses

Limited worldwide market distribution: Compared to its main

competitors, Dr Pepper Snapple’s targeted areas seem somewhat

narrow; it only acquired the majority of its revenue from

Northern America, including the U.S., Canada, and Mexico.lxxiv

Consumers’ preference toward healthier food: Nowadays, more

and more people are aware of the harm that is caused by having

too many soft drinks and drinks with high calories. However, Dr

Pepper Snapple’s revenue streams are mainly from

manufacturing and distributing soft drinks or other high-sugar

beverages.lxxv

Opportunities

Although the beverages industry in the U.S. is mature, there is

room for the industry to grow in foreign, emerging markets such

as China and Latin America.lxxviDr. Pepper Snapple already has

operations in Latin America, as well as in some other countries,

which could put it ahead of smaller competitors in the long term.

For this reason, we predict that DPS’s percentage of sales due to

beverages in Latin America will increase by 15.6% this year.

Threats

One major threat, which poses itself against Dr. Pepper Snapple,

is governmental regulations throughout North America. In 2013,

new policies in Mexico called for an additional peso for every

liter of carbonated soft drinks sold due to rising concerns about

obesity and health care costs. lxxvii Other federal, state, or city

governments could impose regulations such as these in the

future, which could lower Dr. Pepper Snapple’s annual earnings

considerably.

Dr. Pepper Snapple relies on a few large retailers, such as Wal-

Mart, for a hefty portion of its business.lxxviii This poses a threat

to Dr. Pepper Snapple because if an agreement ended with any of

these companies, their sales would decrease dramatically. Since

several of these retailers are so powerful, they also can resist

efforts made by Dr. Pepper Snapple to increase prices.

We used different valuation models, including the Discounted

Cash Flow/ Economic Profit model, Dividend Discount model

and Relative Valuation model to estimate the intrinsic value of

Dr Pepper Snapple. The following table shows our calculated

results:

The DCF and DDM yield very similar results, but we believe

that the DCF is our best model since it contains most of our

assumptions as compared to the other models. The value

calculated from the Relative P/E model rests upon Dr Pepper

Snapple’s major competitors in the beverage industry. Since only

four peers are comparable to Dr Pepper Snapple, which is a

narrow set, we do not think that Relative P/E model is our best

model.

Revenue Decomposition

DPS is decomposed into three main segments, including

beverage concentrates, packaged beverages, and Latin America

beverages. Since the whole U.S. economy is healthy and the

whole beverage industry is still growing at a very slow rate, our

group expects a total 1.27% increase in the net sales of Dr

Pepper Snapple.

Beverage concentration: According to the analysis from the

IBIS World Report for Dr Pepper Snapple, beverage

concentrates are expected to decline at an annual rate of

0.05% in the next five years. This is mainly because the

demand for sugary juices is declining due to changing

consumer preferences, and most of the beverage

concentrates Dr Pepper Snapple Group produces are for

CSDs, followed by juice. lxxix Therefore, our group mostly

agreed with what the IBIS World Report estimates. We

expect that the beverage concentrates will decrease

approximately 0.05% in the next five years.

10

Packaged beverages: The packaged beverages segment is

the main segment of Dr Pepper Snapple since almost 71% of

sales are from this segment. In 2015, our group forecasts its

net sales will decrease by 0.1% due to sluggish demand in

the CSD space.lxxxIn addition, since people tend to care more

about environment issues, they prefer to choose more eco-

friendly products, which will have a negative influence on

packaged beverages.

Latin America beverages: Since 2013, the Latin America

beverages segment has been growing rapidly, by 11.06% in

2013 and 15.15% in 2014. The Latin America beverages

segment participates mainly in the carbonated mineral water,

flavored CSD, bottled water and vegetable juice categories,

with particular strength in carbonated mineral water,

vegetable juice and grapefruit flavored CSDs categories.

Due to the changing preference of people towards healthier

drinks, and because the Latin America beverages segment

sells much healthier beverage products compared with the

other two segments, our group forecasted a 15.5% growth in

this segment in 2015, with a lower growth rate in later years.

Cost of Goods Sold

Since people are changing preferences towards healthier drinks,

the volume of soft drinks of DPS is decreasing, which lowers the

cost of goods sold. Since the price of the majority of Dr Pepper

Snapple’s input costs are expected to decline in 2015, we expect

a decrease in cost of good sold of Dr Pepper Snapple. lxxxi

Selling, General, and Administrative Expense

For the year ended December 31, 2014, selling, general and

administrative ("SG&A") expenses increased $62 million

compared to the prior year. This was due to higher logistics costs

from third-party carriers and increased employee costs from

performance-based incentive compensation. In addition, based

on the historical data from Dr Pepper Snapple’s financial

documents, we found that the average spending on SG&A was

around 38% of net sales from 2011-2014. Therefore, our group

estimates that the selling, general, and administration cost will

increase by 0.17% compared to that of 2014, which will equate

to 38.3% of the net sales in 2015.

Depreciation

We used the historical average 10.2% depreciation rate to

determine the future depreciation amount. In addition, forecasted

depreciation is used to estimate the net property, plant and

equipment on the balance sheet.

Weighted Average Cost of Capital Data Change

The weighted average cost of capital (WACC) is the rate that a

company is expected to pay on average to all its security holders

to finance its assets.lxxxii Dr Pepper Snapple’s weighted average

cost of capital is calculated at 5.43%.

We applied the Capital Asset Pricing Model (CAPM) to

calculate the cost of equity. DPS has a relatively low beta of 0.73

and the risk-free rate is calculated by using the current yield to

maturity (YTM) of the 30-year U.S. Treasury bond. The market

risk premium is 4.62%, using the U.S. historical geometric

average. Based on the CAPM, we obtained the cost of equity at

5.91%. Pre-tax cost of debt of DPS is 4.25% by using the YTM

of DPS’s 23-year bond. After a 34.58% marginal tax rate, after-

tax cost of debt is calculated at 2.78%. Since DPS does not issue

any preferred shares, no calculation regarding preferred stock is

in the WACC. After considering the market value of equity and

debt (including the PV of operating leases), we obtained the final

weighted average cost of capital of 5.43%. The WACC is

relatively low in our model because of the low risk-free rate, low

after-tax debt rate, and low beta.

Dividend Discount Model (DDM)

By using the Dividend Discount Model, we got the intrinsic

value of Dr Pepper Snapple at $76.01, adjusted to $76.81 on

April 21, 2015. Our result was based on the assumptions of CV

growth rate at 1.40% and CV ROE at 32%. Dr Pepper Snapple is

currently involved in a highly competitive industry. Therefore, as

a company that is defensive to market changes, we expect the

EPS growth rate to be only 1.4%. Dr Pepper Snapple has been

paying out dividends for several years, which provides us with

consolidated historical evidence for future forecasting. However,

it is still difficult for us to have full control of the dividend

payout policy because high dividends do not always significantly

indicate a satisfactory current performance or bright future.

Relative Price to Earnings (P/E) Model

The relative P/E does not provide a good estimate of the intrinsic

value of Dr Pepper Snapple Group. It provides a price of $83.72,

which is close to the range of $52.00-$82.00, which we believe is

the appropriate price for the stock. We believe it is a poor

measure of the intrinsic value of Dr Pepper Snapple Group

however because there are very few major companies within the

beverage industry. So, if one company’s earnings change, the

estimate given by the model will change easily.

This model also gave a P/E of 21.1, which we believe is low

relative to Dr Pepper Snapple Group’s peers (see figure 11).

It is low compared to its peers because it has a low expected

level of growth. The P/E value from the model is almost the

same as the value we calculated in our DDM model however, of

21.21. If the P/E were higher, it would cause the stock price in

the model to increase, and vice versa.

DCF /EP Models

We believe this model provides the best estimate of Dr Pepper

Snapple Group’s intrinsic value because it incorporates most of

our expectations about the future growth of DPS, as well as our

estimations for the WACC and the current state of the economy.

We estimated CV growth of NOPLAT to be approximately 1.4%

because growth in the beverage industry is expected to be

smaller than growth in the foods industry. lxxxiii This is mainly

because the market is so heavily dominated by major players,

which makes it hard for the industry to grow significantly. Real

11

GDP also is only expected to increase by 3.15% in 2015, so the

CV growth of NOPLAT had to be less than that.

We also believe this model gives a slightly better estimate of Dr

Pepper Snapple Group’s intrinsic value than the DDM because

we felt we had more control over the assumptions used. We felt

more comfortable with our CV growth of NOPLAT than with

our CV growth of EPS because more of our own assumptions

and forecasts were used to calculate NOPLAT. If we had

estimated the CV growth of NOPLAT to be 2% instead of 1.4%,

the intrinsic value in the DCF would have risen by 15.16%. If we

had estimated it to be 1%, the intrinsic value would have

decreased by 7.8%.

Finally, we believe the DCF is a better estimate than the relative

P/E model because the relative P/E model considers the average

earnings per share of other companies within the industry. Since

there are only a few major players within the beverages industry,

we feel that this is not as accurate of an estimate because the

results can easily change if one company’s earnings change.

Dividend Discount: Our group created five sensitivity analysis

tables in order to better understand how key assumption changes

will influence the final results of intrinsic value in our models.

Since we believe DCF model gives us a better intrinsic value of

Dr Pepper Snapple, we tested the adjusted price in DCF models.

CV Growth of NOPLAT & Beta

The first sensitivity analysis table created is to test the impact of

continuing value growth of NOPLAT and beta on price. Beta

measures a stock's volatility, the degree to which its price

fluctuates in relation to the market. lxxxiv Beta is also a critical

variable that influences the cost of equity and thus influences the

cost of capital. Continuing value growth of NOPLAT is another

important factor to test since continuing value growth of

NOPLAT indicates the future growth rate of Dr Pepper Snapple.

According to our test result, an increase in beta will lower the

price while an increase in continuing value growth of NOPLAT

will raise the stock price. When the beta increases from 0.73-

0.74, which is 1.4% increase, the tested price decreased by

approximately $1. When continuing value growth of NOPLAT

changes by 0.02%, the price fluctuates by $0.32-$0.36. Since

the continuing value growth of NOPLAT has already been

expected to be very low for Dr Pepper Snapple, it will not

greatly influence the tested stock price.

Risk Free & CV ROIC

Continuing value of return on invested capital is calculated by

the NOPLAT divided by the beginning invested capital. It is a

critical assumption in calculating DCF model. In addition, the

risk-free rate is used in the WACC calculation. Therefore, we

tested those two variables to see how the targeted DCF price

would change. Based on the sensitivity analysis, the change of

the risk-free rate has more influence on the change of the price

while continuing value of return on invested capital has subtle

influence on the change of price. When ROIC increases by 0.5%,

targeted price grows by $0.10. However, when the risk-free rate

changes merely by 0.05%, the price changes around $1.00,

which is 10 times the price change compared with what resulted

from the change in ROIC.

Cost of Equity & After-Tax Cost of Debt

Cost of equity and after-tax cost of debt are both important to

test since it is calculated in the WACC. After running the test,

we found that both elements have great impacts on the change of

the adjusted price. However, the price fluctuates more when the

cost of equity changes and the after-tax cost of debt is held

constant. Instead, the price changes less when the cost of equity

is held constant.

SGA/Sales & COGS/Sales

Our group tested two vital assumptions in the operating variables,

SGA/Sales and COGS/Sales. The proportion of cost of goods

12

sold and selling, general and administration in sales is crucial to

test because those two assumptions can influence the NI income

greatly. When both of these costs increase by 0.3%, price

changes by $1.40-$1.60. The higher the proportion of those costs,

the lower the price will be. Both of the operating variables have

great impact on the final stock price. ??

CV Growth of NOPLAT & Capital Expenditure

Capital expenditures are essential to every company. We mixed

the structural assumption, which is the continuing value growth

of NOPLAT, and an operating assumption to test the price

change of Dr Pepper Snapple. Compared with the continuing

value growth of NOPLAT, capital expenditures have less

influence on the tested price. When capital expenditures increase

to $180 million, which is a 0.058% increase, price changes only

by $0.20. Alternatively, when the continuing value growth of

NOPLAT changes by 0.02%, price changes by $0.30-$0.40.

13

Important Disclaimer

This report was created by students enrolled in the Security

Analysis (6F:112) class at the University of Iowa. The report

was originally created to offer an internal investment

recommendation for the University of Iowa Krause Fund and its

advisory board. The report also provides potential employers and

other interested parties an example of the students’ skills,

knowledge and abilities. Members of the Krause Fund are not

registered investment advisors, brokers or officially licensed

financial professionals. The investment advice contained in this

report does not represent an offer or solicitation to buy or sell

any of the securities mentioned. Unless otherwise noted, facts

and figures included in this report are from publicly available

sources. This report is not a complete compilation of data, and its

accuracy is not guaranteed. From time to time, the University of

Iowa, its faculty, staff, students, or the Krause Fund may hold a

financial interest in the companies mentioned in this report.

14

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=1418135-14-8&CIK=1418135, accessed Feb. 24, 2015. lxiv Dr Pepper Snapple Group, Inc. Form 10-K,” pgs.47,


4000008/dps-


accessed Feb. 15, 2015. lxv Statista, “Market share of leading carbonated soft drink




Feb. 15, 2015. lxvi Trefis Team, “Earnings Round-Up: Coca-Cola, PepsiCo And

Dr Pepper Snapple”, Forbes, Feb.20, 2015,

http://www.forbes.com/sites/greatspeculations/2015/02/20/earni

ngs-round-up-coca-cola-pepsico-and-dr-pepper-snapple/,

accessed Apr. 20, 2015 lxvii David Gelles, “Coke to Buy Stake in Monster Beverage for

$2.15 Billion”, The New York Times, August 14, 2014,

http://dealbook.nytimes.com/2014/08/14/coke-to-buy-stake-in-

monster-beverage-for-2-15-billion/?_r=0, accessed Feb. 15, 2015. lxviii Dr Pepper Snapple Group, Inc. Form 10-K,” pgs.47,


4000008/dps-


accessed Feb. 15, 2015. lxviii Statista, “Market share of leading carbonated soft drink




Feb. 15, 2015. lxix Sam Diedrich, “The Dollar Rally: Where does the Buck

Stop?” Forbes, Oct. 14, 2014,

http://www.forbes.com/sites/greatspeculations/2014/10/14/the-

dollar-rally-where-will-the-buck-stop/, accessed Feb. 15, 2015. lxx Dr Pepper Snapple Group, Inc. Form 10-K,” pgs.47,


4000008/dps-


accessed Feb. 15, 2015. lxx Statista, “Market share of leading carbonated soft drink




Feb. 15, 2015

lxxi United States Securities and Exchange Commission, “Dr

Pepper Snapple Group, Inc. Form 10-K,” page 4 &5,


4000008/dps-

10kx123113.htm#s805A81D3A8762FDE5211EBF5C5DADD83

, accessed Feb. 15, 2015. lxxii United States Securities and Exchange Commission, “Dr

Pepper Snapple Group, Inc. Form 10-K,” page 4 & 5,


4000008/dps-


, accessed Feb. 15, 2015. lxxiii United States Securities and Exchange Commission, “Dr

Pepper Snapple Group, Inc. Form 10-K,” page 4 & 5,


4000008/dps-


, accessed Feb. 15, 2015. lxxiv Adam, “Dr Pepper Snapple Group SWOT Analysis,” Nov.

15, 2012,

http://www.freeswotanalysis.com/soft_drink_and_beverage/511-

dr-pepper-snapple-group-swot-analysis.html, accessed Feb. 15,

2015. lxxv Adam, “Dr Pepper Snapple Group SWOT Analysis,” Nov. 15,

2012,

http://www.freeswotanalysis.com/soft_drink_and_beverage/511-

dr-pepper-snapple-group-swot-analysis.html, accessed Feb. 15,

2015. lxxvi Dr Pepper Snapple Group, Inc. Form 10-K,” pgs.47,


4000008/dps-


accessed Feb. 15, 2015. lxxvi Statista, “Market share of leading carbonated soft drink




Feb. 15, 2015. lxxvii Dr Pepper Snapple Group, Inc. Form 10-K,” pgs.47,


4000008/dps-


accessed Feb. 15, 2015. lxxvii Statista, “Market share of leading carbonated soft drink




Feb. 15, 2015. lxxviii United States Securities and Exchange Commission, “Dr

Pepper Snapple Group, Inc. Form 10-K,” pg. 57,


4000008/dps-


accessed Feb. 15, 2015. lxxix Jocelyn Phillips, IBISWorld Industry Report, August 2014,

http://clients1.ibisworld.com.proxy.lib.uiowa.edu/reports/us/indu

stry/default.aspx?entid=275, accessed Apr. 20, 2015.

17

lxxx Sharon Bailey, “Will Dr Pepper Snapple Sales Growth

Outperform Peers,” Apr. 20, 2015,

https://marketrealist.com/2015/04/will-dr-pepper-snapples-sales-

growth-outperform-peers-1q15/, accessed Apr. 21, 2015. lxxxi The World Bank, “Declines Commodity Prices Likely

Continue Through 2015, Says WB Report,” Oct. 16, 2014,

http://www.worldbank.org/en/news/press-

release/2014/10/16/declines-commodity-prices-likely-continue-

through-2015-says-wb-report, accessed Feb. 18, 2015. lxxxiiWikipedia, “Weighted Average Cost of Capital,”

http://en.wikipedia.org/wiki/Weighted_average_cost_of_capital,

accessed Mar. 23, 2015. lxxxiii Sarah Day Levesque, “Private Label Beverages,” Mintel

Online, Dec. 2013, accessed Apr. 20, 2015. lxxxiv Zacks, “Education: Aggressive Growth Investing,”

http://www.zacks.com/education/articles.php?id=58a, accessed

Apr. 14. 2015.

Dr. Pepper Snapple Group, Inc.

Key Assumptions of Valuation Model

Ticker Symbol DPS

Current Share Price $77.79

Current Model Date 4/20/2015

Fiscal Year End Dec. 31

Pre‐Tax Cost of Debt 4.25%

Beta 0.73

Risk‐Free Rate 2.54%

Equity Risk Premium 4.62%

CV Growth of NOPLAT 1.40%

CV Growth of EPS 1.40%

Current Dividend Yield 1.92

Marginal Tax Rate 34.58%

Effective Tax Rate 34.60%

After Tax Debt 2.78%

CV growth of ROIC 23.43%

Cost of Equity 5.91%

WACC 5.43%


Revenue Decomposition

6199.37 6328.16

Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Beverage Concentrates 1,156 1,193 1,221 1,229 1,228 1,227 1,227 1,227 1,226 1,225

Growth 8.75% 3.20% 2.35% 0.66% ‐0.08% ‐0.05% ‐0.01% ‐0.04% ‐0.06% ‐0.05%

Packaged Beverages 4,098 4,292 4,358 4,306 4,361 4,357 4,378 4,413 4,462 4,524

Growth ‐0.32% 4.73% 1.54% ‐1.19% 1.28% ‐0.10% 0.50% 0.80% 1.10% 1.40%

Latin America Beverages 382 418 416 462 532 615 705 772 851 928

Growth 7.00% 9.42% ‐0.48% 11.06% 15.15% 15.55% 14.71% 9.44% 10.32% 8.98%

Total Net Sales 5,636 5,903 5,995 5,997 6,121 6,199 6,311 6,412 6,539 6,678

Change in Total Net Sales 1.90% 4.74% 1.56% 0.03% 2.07% 1.27% 1.81% 1.60% 1.99% 2.11%

2.06%

% of Sales 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Beverage Concentrates 20.51% 20.21% 20.37% 20.49% 20.06% 19.80% 19.45% 19.13% 18.75% 18.35%

Packaged Beverages 72.71% 72.71% 72.69% 71.80% 71.25% 70.28% 69.38% 68.83% 68.23% 67.75%

Latin America Beverages 6.78% 7.08% 6.94% 7.70% 8.69% 9.92% 11.17% 12.04% 13.02% 13.89%Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Dr. Pepper Snapple Group, Inc. 37.66% 39.97% 36.68% 37.74% 37.95% 38.00% 38.07% 37.69%Income Statement 26.38% ‐40.41% 30.57% 32.57% 34.29% 34.29% 34.29% 34.29%

(Millions, except per share data) 35.69% ‐14.94% 34.58% 36% Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Net sales 5,995 5,997 6,121 6,199 6,311 6,412 6,539 6,678 Cost of sales 2,500 2,499 2,491 2,492 2,531 2,584 2,622 2,691 Gross profit 3,495 3,498 3,630 3,707 3,780 3,828 3,917 3,987 Selling, general & administrative expenses 2,268 2,272 2,334 2,374 2,423 2,462 2,521 2,568 Multi-employer pension plan withdrawal - 56 - - - - - - Depreciation & amortization 124 115 115 116 124 129 134 141 Other operating expense, net 11 9 1 8 8 8 8 8 Income from operations 1,092 1,046 1,180 1,208 1,225 1,229 1,254 1,270 Interest expense 125 123 109 110 118 117 117 116 Interest income 2 2 2 3 3 2 2 2 Other expense (income), net 9 (383) - - - 14 - 14 Earnings from continuing operations before income taxes 978 542 1,073 1,101 1,109 1,101 1,139 1,143 Provision (benefit) for income taxes 349 (81) 371 396 399 396 410 411 Income before equity in earnings of unconsolidated subsidiaries 629 623 702 705 710 704 729 731 Equity in earnings of unconsolidated subsidiaries, net of tax - 1 1 1 1 - 1 1 Net income 629 624 703 706 711 704 730 732 Year end shares outstanding 205.29 197.98 192.96 188.00 183.33 178.94 174.79 170.89

Basic EPS $ 2.99 $ 3.08 $ 3.59 3.71$ 3.83$ 3.89$ 4.13$ 4.24$ Dividends per common share $ 1.36 $ 1.52 $ 1.64 1.67$ 1.76$ 1.80$ 1.92$ 1.94$


Balance Sheet 0.30 0.31 0.32 0.29 0.30 0.30 0.30 0.30

(Millions)

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

AssetCurrent AssetCash & cash equivalents 366 153 237 236 269 256 234 251 Accounts receivable, trade, net 602 622 617 637 650 655 670 683 Inventories 197 200 204 222 216 217 223 229 Deferred tax assets 66 66 67 38 15 20 25 20 Prepaid expenses & other current assets 104 78 86 106 102 99 99 104 Total current assets 1,335 1,119 1,211 1,239 1,252 1,248 1,252 1,287 Gross Property, plant & equipment 2,365 2,452 2,542 2,728 2,912 3,098 3,290 3,484

Less: Accumulated depreciation and amortization (1,163) (1,279) (1,401) (1,517) (1,642) (1,770) (1,904) (2,045) Property, plant & equipment, net 1,202 1,173 1,141 1,210 1,270 1,327 1,385 1,439 Investments in unconsolidated subsidiaries 14 15 14 14 14 14 14 14 Goodwill, net 2,983 2,988 2,990 2,990 2,990 2,990 2,990 2,990 Other intangible assets, net 2,684 2,694 2,684 2,682 2,684 2,684 2,681 2,680 Other non-current assets 580 127 159 160 149 161 157 162 Non-current deferred tax assets 130 85 74 63 53 43 36 30 Total assets 8,928 8,201 8,273 8,359 8,412 8,467 8,515 8,603

Liabilites & EquityCurrent LiabilitiesAccounts payable 283 271 289 286 293 296 304 309 Deferred revenue 65 65 64 68 68 67 67 67 Short-term borrowings & current portion of long-term obligations 250 66 3 - 500 - 724 250 Income taxes payable 45 33 10 29 24 21 25 23 Other current liabilities 589 595 672 615 618 625 632 622 Total current liabilities 1,232 1,030 1,038 998 1,503 1,010 1,753 1,272 Long-term obligations 2,554 2,508 2,588 2,399 1,982 2,555 1,857 2,335 Non-current deferred tax liabilities 630 755 801 817 759 801 846 869 Non-current deferred revenue 1,386 1,318 1,250 1,247 1,315 1,312 1,339 1,375 Other non-current liabilities 846 313 302 610 577 530 466 497 Total liabilities 6,648 5,924 5,979 6,073 6,136 6,208 6,261 6,348

Stockholders' Equity Common Stock and Additional paid-in capital 1,310 972 660 668 677 685 694 702Retained earnings (accumulated deficit) 1,080 1,393 1,771 1755 1736 1710 1697 1690Accumulated other comprehensive income (loss) (110) (88) (137) (137) (137) (137) (137) (137) Total stockholders' equity 2,280 2,277 2,294 2286 2275 2258 2254 2255 Total liabilities and stockholder's equity 8928 8201 8273 8359 8412 8467 8515 8603


Cash Flow Statement

(Millions) Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014

Net income (loss) 528 606 629 624 703 Depreciation expense 185 198 203 196 199 Amortization expense 38 34 37 38 36 Amortization of deferred financing costs 5 - - - - Amortization of deferred revenue (37) (65) (65) (65) (65) Employee stock-based compensation expense 29 34 35 37 48 Deferred income taxes 37 (498) 91 138 43 Loss (gain) on early extinguishment of debt 100 - - - - Provision for doubtful accounts 1 - - - - Loss (gain) on disposal of property & intangible assets 8 - - - - Unrealized loss (gain) on derivatives (1) - - - - Other adjustments, net (1) 24 (18) 35 21 Inventories 19 29 17 (30) (8) Other current & non-current assets (20) (21) (21) 456 (25) Other current & non-current liabilities 1,672 1 (29) (556) 58 Trade accounts payable (48) (30) 10 (6) 29 Income taxes payable 22 521 (468) (6) (12) Trade & other accounts receivable (2) (73) 37 (22) (5) Net change in other operating assets & liabilities 29 - - - - Net cash flows from operating activities 2,535 760 458 866 1,022 Acquisition of business - - - (10) (19) Purchase of property, plant & equipment (246) (215) (193) (179) (170) Purchase of intangible assets - (3) (7) (5) (1) Investments in unconsolidated subsidiaries (1) (2) - - - Proceeds from disposals of property, plant & equipment 18 3 7 1 8 Other cash flows from investing activities 4 - - (2) (3) Net cash flows from investing activities (225) (217) (193) (195) (185) Proceeds from senior unsecured notes & senior unsecured credit facility - 1,000 500 - - Repayment of senior unsecured notes & senior unsecured credit facility (978) (400) (450) (25) - Net issuance of commercial paper - - - 65 (65) Repurchase of shares of common stock (1,113) (522) (400) (400) (400) Proceeds from Issuance of common stockDividends paid (194) (251) (284) (302) (317) Deferred financing charges & debt reacquisition costs paid (1) - (4) - - Tax withholdings related to net share settlements of certain stock awards - - - (13) (16) Proceeds from stock options exercised 6 20 22 15 41 Excess tax benefit on stock-based compensation - 10 16 6 11 Other cash flows from financing activities - (9) (3) (1) (1) Net cash flows from financing activities (228) (152) (603) (880) (747) Effect of exchange rate changes on cash & cash equivalents 5 (5) 3 (4) (6) Net Change in cash & cash equivalents 30 391 (338) (209) 90 Cash & cash equivalents at beginning of year 280 315 701 366 153 Cash & cash equivalents at end of year 315 701 366 153 237


Cash Flow Statement

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E

Net income (loss) 706 711 704 730 732 Depreciation expense 116 124 129 134 141 Change in trade receivable (20) (13) (5) (15) (13) Change in Inventories (18) 6 (1) (6) (6) Change in prepaid expense & other current assets (20) 4 2 0 (5) Change in trade accounts payable (3) 7 3 8 5 Change in deferred revenue 4 (1) (0) (0) (0) Change in income taxes payable 19 (5) (3) 4 (1) Deferred income taxes 56 (25) 48 46 34 Change in other current liabilities (57) 3 7 7 (10) Change in deferred revenue-long term (3) 68 (3) 27 36 Net cash flows from operating activities 781 878 882 935 914

Acquisition of business 0 0 0 0 0

Capital expediture (186) (184) (186) (192) (195) Purchase of intangible assets 2 (1) 0 3 1 Change in investments in unconsolidated subsidiaries (0) (0) (0) (0) (0) Change in other assets (1) 11 (12) 4 (5) Net cash flows from investing activities (185) (174) (198) (185) (199) Change in current short term portion ‐3 500 ‐500 724 ‐474Repurchase of shares of common stock (400) (400) (400) (400) (400) Proceeds from issuance of common stock (ESOP) 8 8 8 8 8 Chang in other long-term liabilities 308 (33) (47) (63) 31 Dividends paid (322) (330) (330) (343) (340) Change in other non-cureent liabilities (189) (417) 573 (698) 477 Change in accumulated other comprehensive income 0 0 0 0 0 Net cash flows from financing activities (597) (672) (696) (772) (697) Effect of exchange rate changes on cash & cash equivalents Net Change in cash & cash equivalents ‐1 32 ‐12 ‐22 17

Cash & cash equivalents at beginning of year 237 236 269 256 234

Cash & cash equivalents at end of year 236 269 256 234 251

Dr. Pepper Snapple Group, Inc. 38.02% 38.34% 0.17%

Common Size Income Statement 0.0156185 0.0199902 0.82%

41.32%Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of sales 41.70% 41.67% 41.02% 40.20% 40.10% 40.30% 40.10% 40.30%

Gross profit 58.30% 58.33% 59.30% 59.80% 59.90% 59.70% 59.90% 59.70%

Selling, general & administrative expenses 37.83% 37.89% 38.13% 38.30% 38.40% 38.40% 38.55% 38.45%

Multi-employer pension plan withdrawal ‐ 0.93% ‐ ‐ ‐ ‐ ‐ ‐

Depreciation & amortization 2.07% 1.92% 1.88% 1.88% 1.97% 2.01% 2.05% 2.11%

Other operating expense, net 0.18% 0.15% 0.02% 0.13% 0.13% 0.12% 0.12% 0.12%

Income from operations 18.22% 17.44% 19.28% 19.49% 19.40% 19.17% 19.18% 19.02%

Interest expense 2.09% 2.05% 1.78% 1.77% 1.87% 1.82% 1.79% 1.73%

Interest income 0.03% 0.03% 0.03% 0.05% 0.05% 0.03% 0.03% 0.03%

Other expense (income), net 0.15% ‐6.39% ‐ 0.00% 0.00% 0.22% 0.00% 0.21%

Earnings from continuing operations before income taxes 16.31% 9.04% 17.53% 17.77% 17.58% 17.16% 17.42% 17.11%

Provision (benefit) for income taxes 5.82% ‐1.35% 6.06% 6.40% 6.33% 6.18% 6.27% 6.16%

Income before equity in earnings of unconsolidated subsidiaries 10.49% 10.39% 11.47% 11.37% 11.25% 10.98% 11.15% 10.95%

Equity in earnings of unconsolidated subsidiaries, net of tax ‐ 0.02% 0.02% 0.02% 0.02% 0.00% 0.02% 0.01%

Net income 10.49% 10.41% 11.49% 11.39% 11.27% 10.98% 11.16% 10.97%

Year end shares outstanding 3.42% 3.30% 3.15% 3.03% 2.91% 2.79% 2.67% 2.56%

Basic EPS 0.05% 0.05% 0.06% 0.06% 0.06% 0.06% 0.06% 0.06%

Dividends per common share 0.02% 0.03% 0.03% 0.03% 0.03% 0.03% 0.03% 0.03%


Common Size Balance Sheet(% of sales, 2 decimals)Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

AssetCurrent AssetCash & cash equivalents 6.11% 2.55% 3.87% 3.81% 4.26% 4.00% 3.58% 3.76%Accounts receivable, trade, net 10.04% 10.37% 10.08% 10.28% 10.31% 10.22% 10.25% 10.23%Inventories 3.29% 3.34% 3.33% 3.57% 3.42% 3.39% 3.41% 3.43%Deferred tax assets 1.10% 1.10% 1.09% 0.62% 0.24% 0.31% 0.38% 0.30%Prepaid expenses & other current assets 1.73% 1.30% 1.40% 1.70% 1.61% 1.55% 1.51% 1.56% Total current assets 22.27% 18.66% 19.78% 19.99% 19.83% 19.46% 19.14% 19.28%Gross Property, plant & equipment 39.45% 40.89% 41.53% 44.00% 46.14% 48.31% 50.30% 52.18%

Less: Accumulated depreciation and amortization -19.40% -21.33% -22.89% -24.48% -26.01% -27.61% -29.12% -30.62%Property, plant & equipment, net 20.05% 19.56% 18.64% 19.52% 20.13% 20.70% 21.18% 21.55%Investments in unconsolidated subsidiaries 0.23% 0.25% 0.23% 0.23% 0.22% 0.22% 0.21% 0.21%Goodwill, net 49.76% 49.82% 48.85% 48.24% 47.38% 46.63% 45.72% 44.78%Other intangible assets, net 44.77% 44.92% 43.85% 43.27% 42.52% 41.85% 41.00% 40.14%Other non-current assets 9.67% 2.12% 2.60% 2.58% 2.36% 2.51% 2.39% 2.43%Non-current deferred tax assets 2.17% 1.42% 1.21% 1.02% 0.85% 0.67% 0.56% 0.46% Total assets 148.92% 136.75% 135.16% 134.85% 133.29% 132.04% 130.21% 128.83%

Liabilites & EquityCurrent Liabilities 1.56%Accounts payable 4.72% 4.52% 4.72% 4.61% 4.64% 4.62% 4.65% 4.63%Deferred revenue 1.08% 1.08% 1.05% 1.10% 1.07% 1.05% 1.03% 1.01%Short-term borrowings & current portion of long-term obligations 4.17% 1.10% 0.05% 0.00% 7.92% 0.00% 11.07% 3.74%Income taxes payable 0.75% 0.55% 0.16% 0.47% 0.38% 0.33% 0.38% 0.35%Other current liabilities 9.82% 9.92% 10.98% 9.92% 9.79% 9.75% 9.67% 9.32% Total current liabilities 20.55% 17.18% 16.96% 16.11% 23.81% 15.75% 26.80% 19.05%Long-term obligations 42.60% 41.82% 42.28% 38.70% 31.41% 39.85% 28.40% 34.96%Non-current deferred tax liabilities 10.51% 12.59% 13.09% 13.19% 12.03% 12.50% 12.94% 13.02%Non-current deferred revenue 23.12% 21.98% 20.42% 20.12% 20.84% 20.46% 20.47% 20.59%Other non-current liabilities 14.11% 5.22% 4.93% 10.37% 9.68% 8.86% 7.81% 8.33% Total liabilities 110.89% 98.78% 97.68% 97.97% 97.23% 96.82% 95.75% 95.07%

Stockholders' Equity Common Stock and Additional paid-in capital 21.85% 16.21% 10.78% 10.78% 10.73% 10.69% 10.61% 10.52%Retained earnings (accumulated deficit) 18.02% 23.23% 28.93% 28.31% 27.50% 26.67% 25.95% 25.30%Accumulated other comprehensive income (loss) -1.83% -1.47% -2.24% -2.21% -2.17% -2.14% -2.09% -2.05% Total stockholders' equity 38.03% 37.97% 37.48% 36.88% 36.06% 35.22% 34.46% 33.77% Total liabilities and stockholder's equity 148.92% 136.75% 135.16% 134.85% 133.29% 132.04% 130.21% 128.83%


Value Driver Estimation

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Revenue 5,995 5,997 6,121 6,199 6,311 6,412 6,539 6,678

Less: Cost of sales 2,500 2,499 2,491 2,492 2,531 2,584 2,622 2,691

Less: Selling, general & administrative expenses 2,268 2,272 2,334 2,374 2,423 2,462 2,521 2,568

Less: Depreciation & amortization 124 115 115 116 124 129 134 141

Less: Other operating expense, net 11 9 1 8 8 8 8 8

Plus: Implied interest on operating leases 9.44 9.61 8.63 9.15 9.60 10.04 10.47 10.88

EBITA 1,101 1,112 1,189 1,218 1,234 1,239 1,265 1,281

Marginal Taxes 37.66% 39.97% 36.68% 37.74% 37.95% 38.00% 38.07% 37.69%

Provisions (benefits) for taxes 349 (81) 371 396 399 396 410 411

Plus: Tax shield on interest expense 47 49 40 42 45 44 45 44

Less: Tax shield on income 1 1 1 1 1 1 1 1

Plus: Tax shield on other expense (income) 3 (153) ‐ ‐ ‐ 5 ‐ 5

Plus: Tax shield on multi‐employer pension plan withdrawl ‐ 22 ‐ ‐ ‐ ‐ ‐ ‐

Plus: Tax shield on implied interest of operating Leases 4 4 3 3 4 4 4 4

Total adjusted taxes 402 (159) 413 440 447 449 458 464

Change in deferred taxes 91 138 43 56 (25) 48 46 34

NOPLAT 790 1,409 818 833 762 838 853 852

Operating Current Assets:

Normal Cash 60 60 61 62 63 64 65 67

Accounts Receivable 602 622 617 637 650 655 670 683

Inventory 197 200 204 222 216 217 223 229

Prepaid Expenses and other current assets 104 78 86 106 102 99 99 104

Non Interest‐Bearing Current Liabilities:

Accounts Payable 283 271 289 286 293 296 304 309

Deferred Revenue 65 65 64 68 68 67 67 67

Income Taxes Payable 45 33 10 29 24 21 25 23

Net Operating Working Capital 570 591 605 643 646 651 661 682

Net Property, Plant, and Equipment 1,202 1,173 1,141 1,210 1,270 1,327 1,385 1,439

Net Intangible Assets 2,684 2,694 2,684 2,682 2,684 2,684 2,681 2,680

PV of Operating Leases 222 226 203 215 226 236 246 256

Net Other Operating Assets 2,906 2,920 2,887 2,898 2,910 2,920 2,927 2,936

Less: Other Operating Liabilities 1,386 1,318 1,250 1,247 1,315 1,312 1,339 1,375

Invested Capital 3,292 3,366 3,383 3,503 3,511 3,586 3,635 3,683

NOPLAT 790 1409 818 833 762 838 853 852

Beg. Invested Capital 2790 3292 3366 3,383 3,503 3,511 3,586 3,635

ROIC 28.32% 42.80% 24.31% 24.62% 21.76% 23.87% 23.77% 23.4253%

NOPLAT 790 1409 818 833 762 838 853 852 Capital Expediture 502 74 17 120 8 75 49 48 FCF 288 1,335 801 713 755 763 803 804

Beg. Invested Capital 3,292 3,366 3,383 3,503 3,511 3,586 3,635 3,683

ROIC‐ WACC 22.90% 37.38% 18.88% 19.19% 16.34% 18.45% 18.35% 18.00%EP 639 1,231 636 649 572 648 658 654


Weighted Average Cost of Capital (WACC) Estimation

WACC 5.43%

Pre‐Tax Cost of Debt 4.25%

Marginal Tax Rate 34.58%

After‐Tax Cost of Debt 2.78%

Beta 0.73

Risk‐Free Rate 2.54%

Equity Risk‐Premium 4.62%

Cost of equity 5.91%

Shares Outstanding 192,957,696

Share Price $77.79

Market value of equity $15,010,179,171.84

Market Value of Debt (Including PV of Operating Leases) $2,794,000,000.00

Market value of firm $17,804,179,171.84


Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

(Millions)

Key Inputs:

CV Growth 1.40%

CV ROIC 23.43%

WACC 5.43%



DCF Model

Period 1 2 3 4 4

FCF $ 712.96 $ 754.54 $ 763.46 $ 803.12 $ 803.78

Continuing value (CV) of FCF $ 19,891.70

PV of FCF Discounted by WACC $ 676.27 $ 678.88 $ 651.56 $ 650.14 $ 16,102.61

Value of Operating Assets $ 18,759.46

Plus: Excess Cash $ 175.06

plus: Other non‐current asset $ 160.00

Less: Long term Debt $ 2,588.00

Less: Short term Debt 3.00$

Less: ESOP 44.34$

Less: PV of Operating Leases 203.00$

Less: Investments in unconsolidated subsidiaries 14.00$

Less Other non-current liabilities 302.00$

Less Other current liabilities 672.00$

Equity in earnings of unconsolidated subsidiaries, net of tax 1.00$

Value of Equity 15,267.18$

Shares Outstanding 192.96$

Intrinsic Value (per share) 79.12$

Adjusted Value (per share) 79.95$

Fiscal Years Ending 2015E 2016E 2017E 2018E 2019E

EP Model

Period 1 2 3 4 4

Economic Profit to Discount 649.34$ 572.35$ 647.77$ 657.98$ 654.34$

Continuing Value (CV) 16,256.54$

PV of FCF Discounted by WACC 615.93$ 514.96$ 552.83$ 532.64$ 13,159.89$

PV (Economic Profit) 15,376.25$

+ Beginning Invested Capital (T=0) 3,383.21$

Value of Operating Assets 18,759.46$

Plus: Excess Cash $ 175.06

plus: Other non‐current asset $ 160.00

Less: Long term Debt 2,588.00$

Less: Short term Debt 3.00$

Less: ESOP 44.34$

Less: PV of Operating Leases 203.00$

Less: Investments in unconsolidated subsidiaries 14.00$

Less Other non-current liabilities 302.00$

Less Other current liabilities 672.00$

Equity in earnings of unconsolidated subsidiaries, net of tax 1.00$

Value of Equity 15,267.18$

Shares Outstanding 192.96$

Intrinsic Value (per share) 79.12$

Adjusted Value (per share) 79.95$


Dividend Discount Model (DDM) or Fundamental P/E Valuation Model


EPS 3.71$ 3.83$ 3.89$ 4.13$ 4.24$

Key Assumptions CV growth 1.40%

CV ROE 32%


Future Cash Flows Period 1 2 3 4 4

P/E Multiple (CV Year) 21.21

EPS (CV Year) 4.24$

Future Stock Price 89.85$

Dividends Per Share 1.67$ 1.76$ 1.80$ 1.92$ 1.94$

Future Cash Flows 1.67$ 1.76$ 1.80$ 1.92$

Future Cash Flows (CV) 89.85$

Discounted Cash Flows 1.58$ 1.57$ 1.51$ 1.52$ 71.40$

Intrinsic Value 76.01$

Adjusted Value 76.80$

Dr. Pepper Snapple Group, Inc.Relative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16

KO The Coca‐Cola Company $40.55 $1.99 $2.14 20.4 18.9 4.87 4.18 3.89

PEP Pepsico, Inc. $95.62 $4.66 $5.05 20.5 18.9 6.77 3.03 2.80

KRFT Kraft Foods Group, Inc. $87.11 $3.24 $3.48 26.9 25.0 4.43 6.07 5.65 MNST Monster Beverage Corporatio $138.40 $3.37 $4.03 41.1 34.3 19.6 2.10 1.75

Average 22.6 21.0 4.4 4.1

DPS Dr. Pepper Snapple Group, Inc $77.79 $3.71 $3.83 21.0 20.3 3.37 6.2 6.0

Implied Value:

Relative P/E (EPS15) $ 83.73

Relative P/E (EPS16) 80.31$

PEG Ratio (EPS15) 55.30$

PEG Ratio (EPS16) 53.07$


Key Management Ratios

Fiscal Years Ending Dec. 31 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Liquidity RatiosCurrent Ratio CA/CL 0.92 1.08 1.09 1.17 1.24 0.83 1.24 0.71 1.01

Quick Ratio (Cash+ST Securities+AR)/CL 0.70 0.79 0.75 0.82 0.87 0.61 0.90 0.52 0.73

Cash Ratio Cash/CL 0.37 0.30 0.15 0.23 0.24 0.18 0.25 0.13 0.20

Activity or Asset‐Management RatiosInventory Turnover Net Sales/AR 9.30 9.96 9.64 9.92 9.73 9.70 9.79 9.76 9.78

Receivable Turnover COGS/Inventory 11.72 12.69 12.50 12.21 11.25 11.71 11.89 11.75 11.76

Fixed Assets Turnover Net Sales/PPE, net 5.12 4.99 5.11 5.36 5.12 4.97 4.83 4.72 4.64

Financial Leverage RatiosDebt Ratio Total Debt/Total Assets 0.21 0.14 0.13 0.13 0.12 0.18 0.12 0.21 0.15

D/E Ratio Total Debt/Total SE 0.69 1.00 1.12 1.10 1.13 1.05 0.87 1.13 0.82

Interest Coverage EBITA/Interest Expense 9.08 8.81 9.04 10.90 11.07 10.44 10.63 10.81 11.08

Profitability RatiosNet Profit Margin Net Income/Revenues 10.27% 10.49% 10.41% 11.49% 11.39% 11.27% 10.98% 11.16% 10.97%

Gross Profit Margin Gross Profit/Revenues 57.90% 58.30% 58.33% 59.30% 59.80% 59.90% 59.70% 59.90% 59.70%

Return on Assets Net Income/Total Assets 6.53% 7.05% 7.61% 8.50% 8.44% 8.45% 8.32% 8.57% 8.51%

Return on Equity Net Income/Total SE 24.64% 27.79% 27.37% 30.87% 30.77% 31.10% 30.95% 32.33% 32.49%

Payout Policy RatiosPayout Ratio Div. per share/EPS 43.68% 45.48% 49.35% 45.68% 45.06% 45.85% 46.29% 46.45% 45.87%

Total Payout Ratio (Dividend+ Repurchase)/Net Income 1.11 1.09 1.14 1.03 1.02 1.03 1.04 1.02 1.01

Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Operating Operating

Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending CV Growth of NOPLAT Leases Fiscal Years Ending 80.7292588603138 Leases

2015 47 2014 58 2013 71

2016 40 2015 53 2014 58

2017 32 2016 44 2015 51

2018 24 2017 36 2016 41

2019 21 2018 28 2017 33

Thereafter 75 Thereafter 73 Thereafter 94

Total Minimum Payments 239 Total Minimum Payments 292 Total Minimum Payments 348

Less: Interest 36 Less: Interest 41 Less: Interest 50

PV of Minimum Payments 203 PV of Minimum Payments 251 PV of Minimum Payments 298

2011

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 4.25% Pre‐Tax Cost of Debt 4.25% Pre‐Tax Cost of Debt 4.25%

Number Years Implied by Year 6 Payment 3.6 Number Years Implied by Year 6 Payment 2.6 Number Years Implied by Year 6 Payment 2.8

Lease PV Lease Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 47 45.1 1 58 55.6 1 71 68.1

2 40 36.8 2 53 48.8 2 58 53.4

3 32 28.2 3 44 38.8 3 51 45.0

4 24 20.3 4 36 30.5 4 41 34.7

5 21 17.1 5 28 22.7 5 33 26.8

6 & beyond 21 55.4 6 & beyond 28 55.0 6 & beyond 33 70.5

PV of Minimum Payments 202.9 PV of Minimum Payments 251.5 PV of Minimum Payments 298.5

Number of Options Outstanding (shares): 1,529,235

Average Time to Maturity (years): 8.20

Expected Annual Number of Options Exercised: 186,492

Current Average Strike Price: 45.27$

Cost of Equity: 5.91% *note left this number alone for now since haven't calcu

Current Stock Price: $77.79

2015E 2016E 2017E 2018E 2019E

Increase in Shares Outstanding: 186,492 186,492 186,492 186,492 186,492

Average Strike Price: 45.27$ 45.27$ 45.27$ 45.27$ 45.27$

Increase in Common Stock Account: 8,442,496 8,442,496 8,442,496 8,442,496 8,442,496

Change in Treasury Stock 400,000,000 400,000,000 400,000,000 400,000,000 400,000,000

Expected Price of Repurchased Shares: 77.79$ 82.39$ 87.26$ 92.42$ 97.88$

Number of Shares Repurchased: 5,142,049 4,854,993 4,583,961 4,328,061 4,086,445

Shares Outstanding (beginning of the year) 192,957,696 188,002,139 183,333,638 178,936,169 174,794,600

Plus: Shares Issued Through ESOP 186,492 186,492 186,492 186,492 186,492

Less: Shares Repurchased in Treasury 5,142,049 4,854,993 4,583,961 4,328,061 4,086,445

Shares Outstanding (end of the year) 188,002,139 183,333,638 178,936,169 174,794,600 170,894,647

Effects of ESOP Exercise and Share Repurchases

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol DPS

Current Stock Price $78.79

Risk Free Rate 1.99%

Current Dividend Yield 1.92%

Annualized St. Dev. of Stock Returns 16.67%

Average Average B‐S Value

Range of Number Exercise Remaining Option of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

Range 1 1,529,235 45.27 8.20 30.27$ 46,292,017$

Total 1,529,235 45.27$ 8.20 40.84$ 46,292,017$

$79.95 0.68 0.69 0.7 0.71 0.72 0.73 0.74 0.75 0.76 0.77 0.78 0.79

1.28% 82.67 81.69 80.73 79.79 78.86 77.95 77.06 76.19 75.33 74.49 73.66 72.85

1.30% 83.03 82.05 81.08 80.13 79.19 78.28 77.38 76.50 75.63 74.79 73.95 73.13

1.32% 83.40 82.40 81.43 80.47 79.53 78.61 77.70 76.81 75.94 75.09 74.25 73.42

1.34% 83.77 82.77 81.78 80.82 79.87 78.94 78.02 77.13 76.25 75.39 74.54 73.71

1.36% 84.15 83.13 82.14 81.16 80.21 79.27 78.35 77.45 76.56 75.69 74.84 74.00

1.38% 84.53 83.50 82.50 81.52 80.55 79.61 78.68 77.77 76.88 76.00 75.14 74.30

1.40% 84.91 83.88 82.87 81.87 80.90 79.95 79.01 78.10 77.20 76.31 75.45 74.60

1.42% 85.30 84.26 83.24 82.24 81.25 80.29 79.35 78.43 77.52 76.63 75.75 74.90

1.44% 85.69 84.64 83.61 82.60 81.61 80.64 79.69 78.76 77.84 76.95 76.06 75.20

1.46% 86.08 85.02 83.98 82.97 81.97 80.99 80.03 79.09 78.17 77.27 76.38 75.51

1.48% 86.48 85.41 84.37 83.34 82.33 81.35 80.38 79.43 78.50 77.59 76.69 75.82

1.50% 86.89 85.81 84.75 83.71 82.70 81.71 80.73 79.77 78.84 77.92 77.01 76.13

1.52% 87.29 86.20 85.14 84.09 83.07 82.07 81.08 80.12 79.17 78.25 77.34 76.44

1.1 1.0 1.0 1.0 1.0 1.0 0.9 0.9 0.9 0.9 0.9 0.9

$79.95 23.18% 23.23% 23.28% 23.33% 23.38% 23.43% 23.48% 23.53% 23.58% 23.63% 23.68% 23.73%

2.24% 86.43 86.44 86.45 86.47 86.48 86.49 86.50 86.51 86.53 86.54 86.55 86.56

2.29% 85.28 85.29 85.30 85.32 85.33 85.34 85.35 85.36 85.38 85.39 85.40 85.41

2.34% 84.15 84.17 84.18 84.19 84.20 84.21 84.23 84.24 84.25 84.26 84.27 84.29

2.39% 83.05 83.07 83.08 83.09 83.10 83.11 83.13 83.14 83.15 83.16 83.17 83.18

2.44% 81.98 81.99 82.00 82.01 82.02 82.04 82.05 82.06 82.07 82.08 82.09 82.11

2.49% 80.92 80.94 80.95 80.96 80.97 80.98 80.99 81.00 81.02 81.03 81.04 81.05

2.54% 79.89 79.90 79.91 79.93 79.94 79.95 79.96 79.97 79.98 79.99 80.01 80.02

2.59% 78.88 78.89 78.90 78.92 78.93 78.94 78.95 78.96 78.97 78.98 78.99 79.01

2.64% 77.89 77.90 77.91 77.93 77.94 77.95 77.96 77.97 77.98 77.99 78.00 78.01

2.69% 76.92 76.93 76.94 76.96 76.97 76.98 76.99 77.00 77.01 77.02 77.03 77.04

2.74% 75.97 75.98 75.99 76.00 76.02 76.03 76.04 76.05 76.06 76.07 76.08 76.09

2.79% 75.04 75.05 75.06 75.07 75.08 75.09 75.11 75.12 75.13 75.14 75.15 75.16

2.84% 74.13 74.14 74.15 74.16 74.17 74.18 74.19 74.20 74.21 74.22 74.23 74.24

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

$79.95 2.53% 2.58% 2.63% 2.68% 2.73% 2.78% 2.83% 2.88% 2.93% 2.98% 3.03% 3.08%

5.61% 87.65 87.43 87.21 86.99 86.77 86.55 86.34 86.12 85.91 85.69 85.48 85.27

5.66% 86.47 86.26 86.04 85.83 85.61 85.40 85.19 84.98 84.77 84.56 84.35 84.14

5.71% 85.32 85.11 84.90 84.69 84.48 84.27 84.07 83.86 83.65 83.45 83.25 83.04

5.76% 84.20 83.99 83.79 83.58 83.38 83.17 82.97 82.77 82.57 82.37 82.17 81.97

5.81% 83.10 82.90 82.69 82.49 82.29 82.09 81.89 81.70 81.50 81.30 81.11 80.91

5.86% 82.02 81.82 81.63 81.43 81.23 81.04 80.84 80.65 80.46 80.26 80.07 79.88

5.91% 80.91 80.72 80.53 80.33 80.14 79.95 79.76 79.57 79.38 79.19 79.01 78.82

5.96% 79.93 79.74 79.56 79.37 79.18 78.99 78.81 78.62 78.43 78.25 78.07 77.88

6.01% 78.92 78.74 78.55 78.37 78.18 78.00 77.82 77.64 77.45 77.27 77.09 76.91

6.06% 77.93 77.75 77.57 77.39 77.21 77.03 76.85 76.67 76.49 76.32 76.14 75.96

6.11% 76.96 76.79 76.61 76.43 76.25 76.08 75.90 75.73 75.55 75.38 75.21 75.03

6.16% 76.01 75.84 75.66 75.49 75.32 75.14 74.97 74.80 74.63 74.46 74.29 74.12

6.21% 75.08 74.91 74.74 74.57 74.40 74.23 74.06 73.89 73.73 73.56 73.39 73.23

0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2

$79.95 38.7% 39.0% 39.3% 39.6% 39.9% 40.2% 40.5% 40.8% 41.1% 41.4% 41.7% 42.0%

36.5% 97.67 96.06 94.45 92.84 91.23 89.62 88.01 86.39 84.78 83.17 81.56 79.95

36.8% 96.06 94.45 92.84 91.23 89.62 88.01 86.39 84.78 83.17 81.56 79.95 78.34

37.1% 94.45 92.84 91.23 89.62 88.01 86.39 84.78 83.17 81.56 79.95 78.34 76.73

37.4% 92.84 91.23 89.62 88.01 86.39 84.78 83.17 81.56 79.95 78.34 76.73 75.12

37.7% 91.23 89.62 88.01 86.39 84.78 83.17 81.56 79.95 78.34 76.73 75.12 73.50

38.0% 89.62 88.01 86.39 84.78 83.17 81.56 79.95 78.34 76.73 75.12 73.50 71.89

38.3% 88.01 86.39 84.78 83.17 81.56 79.95 78.34 76.73 75.12 73.50 71.89 70.28

38.6% 86.39 84.78 83.17 81.56 79.95 78.34 76.73 75.12 73.50 71.89 70.28 68.67

38.9% 85.00 83.39 81.78 80.16 78.55 76.94 75.33 73.72 72.11 70.50 68.89 67.28

39.1% 83.60 81.99 80.38 78.77 77.16 75.55 73.93 72.32 70.71 69.10 67.49 65.88

39.4% 82.20 80.59 78.98 77.37 75.76 74.15 72.54 70.93 69.32 67.70 66.09 64.48

39.6% 80.81 79.20 77.59 75.98 74.36 72.75 71.14 69.53 67.92 66.31 64.70 63.09

39.9% 79.41 77.80 76.19 74.58 72.97 71.36 69.75 68.13 66.52 64.91 63.30 61.69

$79.95 (120) (130) (140) (150) (160) (170) (180) (190) (200) (210) (220) (230)

1.28% 79.15 78.91 78.67 78.43 78.19 77.95 77.72 77.48 77.24 77.00 76.76 76.52

1.30% 79.48 79.24 79.00 78.76 78.52 78.28 78.04 77.80 77.56 77.32 77.08 76.84

1.32% 79.81 79.57 79.33 79.09 78.85 78.61 78.37 78.12 77.88 77.64 77.40 77.16

1.34% 80.15 79.91 79.66 79.42 79.18 78.94 78.69 78.45 78.21 77.97 77.73 77.48

1.36% 80.49 80.24 80.00 79.76 79.51 79.27 79.03 78.78 78.54 78.30 78.05 77.81

1.38% 80.83 80.59 80.34 80.10 79.85 79.61 79.36 79.12 78.88 78.63 78.39 78.14

1.40% 81.18 80.93 80.69 80.44 80.19 79.95 79.70 79.46 79.21 78.97 78.72 78.48

1.42% 81.53 81.28 81.03 80.79 80.54 80.29 80.05 79.80 79.55 79.31 79.06 78.81

1.44% 81.88 81.63 81.38 81.14 80.89 80.64 80.39 80.15 79.90 79.65 79.40 79.15

1.46% 82.24 81.99 81.74 81.49 81.24 80.99 80.74 80.49 80.25 80.00 79.75 79.50

1.48% 82.60 82.35 82.10 81.85 81.60 81.35 81.10 80.85 80.60 80.35 80.10 79.85

1.50% 82.96 82.71 82.46 82.21 81.96 81.71 81.45 81.20 80.95 80.70 80.45 80.20

1.52% 83.33 83.08 82.82 82.57 82.32 82.07 81.81 81.56 81.31 81.06 80.81 80.55

CV Growth

of NOPLAT

SGA/Sales

Cost of Equity

Risk free

Capital Expenditure

CV Growth

of NOPLAT

Beta

CV ROIC

After Tax Rate

COGS/Sales

Documents

Consumer Staples Dr Pepper Snapple Group, Inc. · PDF file2. After we analyzed Dr Pepper Snapple by integrating the U.S. economy, the beverage industry, and its company specific performance,