Monday, February 14, 2011

New Purchase

Dr. Pepper Snapple Group (DPS).  If you've followed the blog in the past, you know that I've had my eye on this one awhile (link to my previous DPS posts).  I've always believed in this industry.  High barriers to entry and this is mostly due to brand recognition and loyalty.  If you look at everyday consumer products, in almost every space, generics are there, and are often seen as viable alternatives.  Why does no one buy the cheap soda?  Whether its just within consumers' perceptions or not, people buy the brand in this industry and almost nothing else.  Now, I'm unlikely to ever buy Coca Cola or Pepsi.  They are huge mature companies.  I like DPS because its still a growing brand.  Through the end of 2010 their plan was to be in every US McDonalds, and the Diet in almost half of their US locations.  We're obviously going to get more info during this Thursday's earnings announcement and conference call.  There are a lot of growth opportunities out there for them, and they appear to be leveraging them well.

Here are some stats on their products: (via last year's CAGNY presentation):

  • 41.3% market share in non-cola soft-drinks.  Think Dr. Pepper, 7Up, Sunkist, Canada Dry, A&W, Crush.
  • Snapple; #1 in premium tea category.
  • #1 in juice. Mott's, Clamato, and Hawaiian Punch. 
  • #1 in alcoholic mixers. Mr and Mrs T, Rose's Cocktail Infusions.
  • #1 in gourmet CSDs. Stewarts and IBC.

By the way, the link to that presentation is a great read if you'd like to get familiar with the company.

They also have the bottling agreements with Coke and Pepsi.  Here's a rundown on their operations .

Potential threats to this investment:

1)Soda Tax- Many states and municipalities are still considering this as a way to generate more revenue.  This has been in play for awhile, and I'm guessing it will come up further in the future, but they can pass prices along to consumers to some extent.  Its just a matter of how significant the taxes are.

2)Overall Inflation- Think input prices.  Plastics mostly.  This is an issue for almost every business, but a bigger issue for a soft drink company.  Again, its a matter of "how much", as a certain amount can be absorbed without disrupting consumer's buying decisions.

I like the stock at these levels, and depending on what we hear Thursday, or if the market corrects, I'd add to this stock.  I'm a pretty patient investor and have made very few sales in the past 18 months.  I do own many small-cap names, and love to own and watch those.  But lately I've also looked to add some mid to large cap names to a just a little stability to my portfolio, and this will fit.

I bought today at $33.74.

Disclosure: Long DPS

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