An Overlooked Soda Stock Gets Sporty [PepsiCo, Inc., The Coca-Cola Co, Dr Pepper Snapple Group Inc.]

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August 27, 2015 11:13am ETF BASIC NEWS

investJay Taylor:  When we think of the “soda wars,” we typically overlook one important name.


Indeed, Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP) are the elephants in the snack and soda room, with market capitalizations of $178 billion and $145 billion, respectively.

Meanwhile, we don’t often hear much from Dr Pepper Snapple (NYSE:DPS), which boasts a valuation of nearly $16 billion and owns well-known brands like Dr Pepper, 7-Up, A&W, Canada Dry, Hawaiian Punch, Yoo-hoo, Schweppes, Snapple and more.

Pepper Upper

Until recently, “sporty” isn’t a word that I would have associated with any of Dr Pepper Snapple’s brands.

The company announced this month that it’s paying $20 million to purchase an 11.7% stake in a relatively new entrant in the sports drink category: BodyArmor. From everything I can see, the deal makes a lot of sense for all parties.

Consider that PepsiCo has its Gatorade lineup and Coca-Cola has its Powerade products. The two companies’ brands essentially dominate the $7 billion sports drink market. According to The Wall Street Journal, Gatorade had 77% market share last year while Powerade had 20% – an amazing 97% of the entire market.

Can you even think of another sports drink brand off the top of your head?

But BodyArmor, a relatively new player in the industry with some big names behind it, is hoping to change that. And with its new partnership, the company’s products should start showing up wherever you see Dr Pepper Snapple’s brands for sale.

All-Star Investors

BodyArmor is headed up by Glaceau Vitaminwater co-founder Mike Repole, which famously sold itself to Coca-Cola for $4.1 billion in 2007. Though Repole brings business credibility to the company, the brand earns its sports credibility from a host of high-profile investors with athletic pedigrees.

Consider that basketball legend Kobe Bryant, college football phenom turned NFL quarterback Andrew Luck and baseball great Mike Trout are all investors in BodyArmor.

From a nutritional perspective, it makes sense that we might see a lot of athletes start using BodyArmor products.

Like Gatorade and Powerade, BodyArmor delivers electrolytes essential to hydration. But, The Wall Street Journal notes that BodyArmor “is lower in sodium, higher in potassium and uses coconut water” instead of the high-fructose corn syrup found in Powerade and artificial colors used in Gatorade.

A Win-Win

Dr Pepper Snapple has actually been distributing BodyArmor products since 2013 – a partnership between two brands that don’t really compete with each other but that both want to play ball with the industry titans.

Its new stake in the privately held BodyArmor could change everything.

With a direct financial incentive to see the brand prosper, I’d be surprised if we don’t start seeing BodyArmor in a lot of new places. Though most people have never even heard of the brand, Body-armor sports drinks could very well invade a supermarket or vending machine near you.

Not only will this boost BodyArmor’s sales, and thus the value of Dr Pepper Snapple’s stake, but the deal could turn out to be huge for Dr Pepper Snapple in the long run.

Consider that 80% of the company’s volume comes from soda, which continues to struggle in the U.S. amidst significant opposition from health advocacy groups. Diversifying its product lineup while investing in a product category that is actually growing is a huge win for Dr Pepper Snapple.

And without plunking down the $171 million it would cost for Dr Pepper Snapple to buy BodyArmor outright – based on its 11.7% stake worth $20 million – the company avoids over-committing itself to a product that has yet to prove itself with the American public.

Return for Deposit

Dr Pepper Snapple stock is essentially flat since the news broke, which I think is a mistake.

The stock pays a quarterly dividend of $0.48 a share, which equates to a 2.3% yield at its current share price. The company also upped its share repurchase plan in February by $1 billion, bringing the total stock buyback authorization to $4 billion. (Share buybacks and dividend payments are a one-two punch for really growing your wealth. Discover the best companies doing both right here.)

I expect that the BodyArmor deal will bring a refreshing boost of energy to an often overlooked soda stock.

This article is brought to you courtesy of Jay Taylor from Wyatt Research.


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