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