Is Dr Pepper Snapple a Good Stock to Buy After a Strong 1H?

We issued an updated research report on Dr Pepper Snapple Group Inc. DPS on Aug 19, 2016.

On Jul 27, the beverage company reported strong second-quarter 2016 results, building upon a strong first quarter performance. Dr Pepper beat the Zacks Consensus Estimate for both earnings and sales in the second-quarter 2016.  On a year-over-year basis, earnings of $1.25 per share increased 11% on the back of higher sales and RCI productivity gains. Sales rose 4%, excluding currency impact on favorable product/package mix along with price hikes and improved volumes.

Moreover, the company raised its earnings expectations for 2016 – for the second time this year - following better-than-expected results in the first half of the year. Earnings soared 12%, while sales rose 2% in the first-half 2016, both on a year-over-year basis.

DR PEPPER SNAPL Price and Consensus

DR PEPPER SNAPL Price and Consensus | DR PEPPER SNAPL Quote

Solid execution, pricing gains, innovations, strong NCB performance, powerful marketing programs and productivity improvements have been driving strong sales and earnings growth for Dr Pepper since 2015.

Dr Pepper's allied brands have been an important driver of volume growth and profits in recent quarters. Dr Pepper is focusing 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.

This year, the Zacks Rank #3 (Hold) company is investing in relevant product and packaging innovation across the priority brands, strengthening the route-to-market, and enhancing marketing return on investment capabilities. In order to escalate sales in second-half 2016, the company is carrying out aggressive marketing programs and strong activation in stores. Further, the company regularly develops brand extensions of innovative products to meet evolving consumer trends.

However, sluggish volumes of its carbonated beverages including the diet versions due to CSD category headwinds holds back growth to a point. Increased health consciousness is hurting demand of carbonated soft drinks CSD of all beverage giants – The Coca-Cola Company KO, PepsiCo, Inc. PEP as well as Dr Pepper.

These CSD category headwinds are considerably affecting Dr Pepper as CSDs comprise around 80% of its business. Management anticipates the CSD category headwinds to continue in the second half and beyond.

Stocks to Consider

A better-ranked beverage stock is Primo Water Corporation PRMW with a Zacks Rank #2 (Buy).

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