Wells Fargo Thinks The Street May Have Already Priced In Dr Pepper's Q2 Results


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Following its analysis of Dr Pepper Snapple Group Inc.

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(NYSE: DPS)'s second-quarter results, Wells Fargo said it continues to think the company is managing its business well to drive top-line growth and margin expansion. Stating that the performance and multiple expansion over the past few years is justified, the firm said it sees limited reason for meaningful margin expansion, citing few additional catalysts in the longer term.

Strong Quarterly Results

Bonnie Herzog, analyst at Wells Fargo, noted that the company reported strong quarterly results, with earnings ahead of expectations. The analyst indicated that volume growth came about from strong showing by carbonated soft drinks, Schweppes and Allied Brands. Favorable macros and productivity initiatives benefited margins, according to Herzog.

Unlike The Coca-Cola Co (NYSE: KO), which saw flat global volume growth this second quarter, the analyst noted that Dr Pepper Snapple grew volumes. This, according to the firm, is an indication that the company is fairly insulated from international macro instability headwinds.

Q2 Top-Line Growth Dissected

Wells Fargo noted that the 4 percent currency neutral net sales growth was driven by favorable product and package mix, pricing and volume, while unfavorable segment mix served as drag. Carbonated soft drink volumes rose 1 percent, and non-carbonated soft drink volumes were up a steeper 2 percent, with waters giving a real thrust at 25 percent growth.


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The firm also noted that operating margins expanded 80 basis points to 22.8 percent, contributing to 6 percent adjusted operating income growth.

Guidance Lifted

Wells Fargo indicated that the company raised its 2016 guidance yet again, reflecting primarily the 2Q earnings beat. Given the underlying momentum in the company's business, the revised guidance remains conservative in the firm's view.

Premium Valuation Justified

The firm noted that consistent earnings growth and broad multiple expansion have helped the company's shares outperform the market and its peers over the last three years. The firm believes the performance and multiple expansion over the past few years is justified. That said, the firm sees limited scope of further meaningful expansion.

Raising Valuation Range

Wells Fargo raised its valuation range for the shares of the company to $91– $93 from $89–$91, assuming they trade at 11.6 times its 2017 EBITDA estimate and 19.1 times its 2017 earnings per share estimate.

The analysts currently have a Market-Perform rating on the stock.

At time of writing, Dr Pepper Snapple was trading at $97.98, up 1.85 percent on the day.

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27% profit every 20 days?

This is what Nic Chahine averages with his option buys. Not selling covered calls or spreads… BUYING options. Most traders don’t even have a winning percentage of 27% buying options. He has an 83% win rate. Here’s how he does it.


Posted In: Analyst ColorEarningsNewsGuidanceAnalyst RatingsMoversAlied BrandsBonnie HerzogSchwweppesWells Fargo