Dr Pepper Snapple (DPS) had a Strong 2015: Will it Continue?

We issued an updated research report on Dr Pepper Snapple Group, Inc. DPS on Mar 3, 2016.

The soft drink company delivered strong quarterly results yet again in the fourth quarter of 2015, beating the Zacks Consensus Estimate for both earnings and sales.

On a year-over-year basis, earnings of $1.00 per share increased 14% as higher pricing, RCI productivity gains and lower commodity costs offset the increase in operating and marketing costs. Constant currency sales rose 4% on favorable product/package mix and price hikes that offset weak volumes.

In fact, the company delivered solid top-line and bottom-line results in 2015 on the back of pricing gains, innovations, strong performance of non-carbonated beverages NCB, powerful marketing programs and productivity improvements.

The RCI program was launched in 2010, which has since then led to strong earnings growth. Though the program has now entered the fifth year of operation, the momentum remains intact.

Dr Pepper's shares also had a good run in 2015, gaining around 33%. The company's allied brands are also gaining strength. Dr Pepper is increasing its focus on forming distribution agreements with emerging, high-growth third-party brands. These allied brand partnerships allow the company to participate in adjacent and growing categories while also fully tapping its manufacturing and distribution network. Allied brands have been an important driver of revenues and profit growth in the past few quarters.

However, the company's 2016 earnings guidance, issued at the conference call, fell short of market expectations. Currency headwinds, softer NCB performance, higher interest and marketing costs can keep profits under pressure in 2016. Currency headwinds are expected to hurt 2016 EPS by 4% and sales by 2% due to the impact of a strong dollar on its Mexican and Canadian businesses. NCB volumes are expected to be down slightly in 2016 due to pricing-related volume erosion and termination of a Mexican distribution agreement on the Aguafiel 10-liter business. Marketing spend is expected to be approximately 7.5% of net sales in 2016. Moreover, interest expense is likely to increase $14 million in 2016 driven by recent debt issuances.

Moreover,sluggish volumes of its carbonated beverages, including the diet versions, due to CSD category headwinds, are a persistent overhang. Cross-category competition and growing health and wellness consciousness — consumers are particularly vigilant about the use of artificial sweeteners, high sugar content and related obesity concerns — are hurting CSD category growth. This, coupled with new taxes on sugar-sweetened beverages and growing regulatory pressures, is affecting CSD sales of major soft drink makers, like The Coca-Cola Company KO and PepsiCo, Inc. PEP. The CSD category headwinds are expected to persist in 2016 as well.

Dr Pepper carries a Zacks Rank #3 (Hold). A better-ranked beverage company is Keurig Green Mountain, Inc. GMCR with a Zacks Rank #1 (Strong Buy).

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