Updated Research Report on Dr Pepper - Analyst Blog

On May 22, 2014, we issued an updated research report on Dr Pepper Snapple Group Inc. DPS.

On Apr 23, the beverage company reported robust first-quarter 2014 results, beating the Zacks Consensus Estimate for both earnings and revenues.

Adjusted earnings of 74 cents per share increased 40% year over year attributable to strong margins, favorable timing of concentrate shipment and lower interest expense and taxes. However, though net sales and volume grew 1% in the quarter, it was only due to the favorable timing of concentrate shipments. Carbonated soft drinks CSD volumes continued to decline in the quarter.

Though the company is consistently delivering strong bottom-line results, it needs to turn around sales. Weak volume trends, ongoing pressure in the U.S. CSD category, and lack of exposure outside the U.S keep us concerned.

The CSD category declined for the ninth straight year in 2013 due to weak consumer spending environment, cross-category competition and growing health and wellness consciousness — consumers are particularly vigilant about artificial sweeteners, high sugar content and related obesity concern. Also, possible new taxes on sugar-sweetened beverages and growing regulatory pressures are affecting CSD sales. These headwinds are significantly affecting Dr Pepper's CSD volumes which comprise around 80–85% of its business.

Dr Pepper is trying to reinvigorate its CSD category through low-calorie versions of its popular brands like Dr Pepper, 7UP, Sunkist Orange Soda, A&W Root Beer, Canada Dry Ginger Ale and RC Cola. The 10-calorie drinks have gained decent success, bringing new as well as lapsed consumers back to the category.

The company also enjoys solid fundamentals — strong position in the flavored CSD market, efficient cost management and regular cash returns to shareholders. Moreover, Dr Pepper's priority brand agreements with beverage giants, The Coca Cola Company KO and PepsiCo, Inc. PEP, ensure that its popular brands are included in all core packages, major merchandising events and display activities that the companies participate in, thus boosting the sales of these brands.

Other Stocks to Consider

Dr Pepper carries a Zacks Rank #3 (Hold). A better-ranked beverage stock is Coca-Cola Enterprises, Inc. CCE with a Zacks Rank #2 (Buy).