On Jun 20, we maintained a Neutral recommendation on
Dr Pepper Snapple Group Inc.
) due to our faith in its long-term fundamentals, despite mixed
Why the Neutral Recommendation?
Dr Pepper's first-quarter 2013 adjusted earnings per share of
47 cents surpassed the Zacks Consensus Estimate by 12.8%.
Earnings also increased 15.2% year over year on the back of
strong margins and lower taxes, which made up for the weak top
Net sales grew only 1% year over year and missed the Zacks
Consensus Estimate as gains from positive price/mix and lower
discounts were offset by weak volumes.
Volumes were hurt by the difficult operating conditions faced
by the CSD category in North America due to increasing health
consciousness, slow consumer spending environment and abnormally
cold weather conditions. Changing consumer preferences,
increasing health consciousness, rising obesity concerns,
possible new taxes to be levied on sugar-sweetened beverages and
the growing regulatory pressures have transformed the CSD
category to a sluggish growth category in North America. These
category headwinds are significantly affecting Dr Pepper's CSD
volumes, which comprise around 80% of its business.
Despite volume concerns, we believe Dr Pepper has sound
long-term fundamentals; commanding a strong position in the
flavored CSD market and generating consistent cost savings and
cash flow improvement under its Rapid Continuous Improvement
(RCI) program. The ongoing productivity improvement program is
Moreover, following the success of the low-calorie version of
its Dr Pepper brand of soft drinks, Dr Pepper TEN, DPS plans to
expand its TEN platform to revive its CSD category growth.
Accordingly, the company launched TEN versions of 7UP, Sunkist
Orange Soda, A&W Root Beer, Canada Dry Ginger Ale and RC Cola
brands in the U.S. in early 2013. However, we prefer to remain on
the sidelines as we believe the new initiative will take some
time to deliver substantial results.
Moreover, DPS' lack of exposure in the fast growing emerging
markets is a significant competitive disadvantage for the company
versus peers like
The Coca Cola Company
), which are fast expanding outside the U.S.
Other Stocks to Consider
DPS carries a Zacks Rank #3 (Hold). A stock in the consumer
staples industry that is currently performing well is
Flowers Foods, Inc.
), carrying a Zacks Rank #1 (Strong Buy).
DR PEPPER SNAPL (DPS): Free Stock Analysis
FLOWERS FOODS (FLO): Free Stock Analysis
COCA COLA CO (KO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
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