On Nov 25, we maintained a Neutral recommendation on
Dr Pepper Snapple Group Inc.
) as we have faith in its long-term fundamentals, despite
consistently weak top-line results.
Why the Neutral Recommendation?
Dr Pepper's third-quarter 2013 (results announced on Oct 23)
adjusted earnings of 88 cents per share beat the Zacks Consensus
Estimate of 83 cents by 6%. Moreover, earnings increased 11% year
over year due to pricing gains, productivity improvements, a
lower tax rate and a LIFO inventory benefit.
However, sales continued to be soft due to weak volumes. Net
sales increased 1% year over year but missed the Zacks Consensus
Estimate as gains from positive price/mix were offset by weak
volumes. Operating income improved 3% in the quarter due to
productivity improvements and LIFO inventory benefit of $14
Volumes were hurt by the difficult operating conditions faced
by the carbonated soft drinks (CSD) category, both regular and
diet, in North America and slow consumer spending environment.
Changing consumer preferences, increasing health consciousness,
rising obesity concerns, possible new taxes to be levied on
sugar-sweetened beverages and the growing regulatory pressures
are tremendously pressurizing the CSD category in the region.
These category headwinds are significantly affecting Dr Pepper's
CSD volumes which comprise around 80% of its business.
Moreover, the company lowered the 2013 top-line guidance for
the second time this year due to CSD category headwinds.
Despite volume concerns, we believe Dr Pepper has sound
long-term fundamentals; commands a strong position in the
flavored CSD market and generates consistent cost savings and
cash flow improvement under its Rapid Continuous Improvement
Moreover, following the success of the low-calorie version of
Dr Pepper brand of soft drinks, Dr Pepper TEN, the company
expanded its TEN platform to revive the 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. earlier this year. 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 as peers like
The Coca Cola Company
) are fast expanding outside the U.S.
Other Stocks to Consider
Dr Pepper carries a Zacks Rank #3 (Hold). A better ranked
beverage company is
Coca-Cola Amatil Limited
), which carries a Zacks Rank #1 (Strong Buy).
COCA-COLA AMATI (CCLAY): Get Free Report
DR PEPPER SNAPL (DPS): Free Stock Analysis
COCA COLA CO (KO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
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