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Stock Strategist

Dr Pepper Snapple's Lofty Valuation Leaves a Sour Taste

With limited revenue growth and margin expansion opportunities, a narrow moat still can't justify the stock price.

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 Dr Pepper Snapple Group (DPS) has enjoyed market share gains and margin expansion over the past several years, but we think the company's already best-in-class profitability and secularly slower top-line growth opportunities leave it overvalued versus peers  Coca-Cola (KO) and  PepsiCo (PEP).

The U.S. soft drink industry makes up nearly all of Dr Pepper's earnings, and while we're not as pessimistic on the geography's future growth as some, given continued price rationality and gains in juices, water, and other noncarbonated beverages, we expect further declines in carbonated drinks will limit the country's growth rate to the low single digits. Moreover, we see limited upside in Dr Pepper's margins, given already solid comparisons to industry leaders Coca-Cola and PepsiCo.

Adam Fleck does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.