Poke your head out the window of any office on Wall Street and you just might catch a glimpse of an investor kicking up his heels and singing, "I'm a pepper, he's a pepper, she's a pepper, we're a pepper; wouldn't you like to be a pepper too?"
And you may be tempted to sip on the stock. Dr Pepper Snapple has quenched the thirst for gains; shares of this company have generated 15% to date.
Sounds refreshing, doesn't it?!!
So why is Jim Cramer more inclined to grab some Pepsi which is down 2% for the year or Coke, which has only gained about 3%?
Cramer thinks the Street's David Naughton-like enthusiasm for this stock has everything to do with the market's willingness to pay a premium for safety.
"The vast majority of Dr. Pepper's business comes from the United States," Cramer explained. "And for the last few months investors have been willing to pay a premium for that kind of safety." But ultimately, Cramer says, companies with mostly US exposure can't grow as quickly as those with exposure overseas. Eventually, he believes this catalyst will turn against the stock.
In addition, Cramer believes gains were due to that wowed Wall Street. When the company reported a couple of weeks ago, Dr Pepple showed a higher first quarter profit that beat expectations.
However, Cramer says dig down into the earnings, and you'll find the catalysts were more likely one-time catalysts. "Part of the earnings strength stemmed from lower general and administrative costs. "Dr. Pepper has gotten very aggressive about cutting costs," Cramer said.
Sales, however, were not impressive.
In the quarterly release, Dr Pepper said volume for its namesake soda fell 4 percent in the period, while its Sunkist soda saw a low-single-digit decline. Volume from fountain sales at restaurants and other locations fell 3 percent.
In noncarbonated drinks, the company said Hawaiian Punch fell 8 percent and Mott's declined 1 percent. (Snapple rose 2 percent and Clamato rose 3 percent.)
Looking at sales and comparing the weakness to the strength in earnings, Cramer said, "I have to conclude that Dr. Pepper has cost-cut its way to outperformance. I'm not going to tell you that earnings generated through cost-cuts don't count but the problem with Dr. Pepper is that they've already trimmed the low-hanging fruit and there are far fewer opportunities to cut costs going forward."
"Coke and Pepsi may have lagged Dr. Pepper so far for 2014, but I bet they play catch-up through the rest of the year because they have real organic revenue growth," Cramer said.
"Also, Coca-Cola generates massive amounts of cash, and they are terrific at managing that cash: reinvesting it in the business to fuel growth, making smart acquisitions and joint ventures like their stake in Keurig, and returning a lot of cash to shareholders, including a dividend that yields 3%."
Turning attention to Pepsi, Cramer said, "Not only does PepsiCo have a terrific international growth story, but it also has a fabulous snack business in the form of Frito-Lay, and snacks have been a stronger market than carbonated soft-drinks."
Also Cramer says Pepsi shares have another catalyst in the form of billionaire investor Nelson Peltz who is agitating for Pepsi to unlock shareholder value. No matter what ultimately happens, Cramer says activist investors tend to generate gains in share price.
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Therefore, even though Dr Pepper has outperformed rivals in the first half of the year, Cramer would rather own Coke or Pepsi. "I believe Dr Pepper's outperformance was driven by finite cost-cutting and a flight to safety. Going forward, I think Dr. Pepper has run out of major costs to cut, while both Coke and Pepsi are facing significant growth overseas. I like them both, but PepsiCo is my favorite."
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