On Apr 10, we maintained a Neutral recommendation on
Dr Pepper Snapple Group Inc.
) due to our faith in its long-term fundamentals, despite weak
Why the Neutral Recommendation?
Dr Pepper's fourth-quarter 2012 earnings of 82 cents per share
missed the Zacks Consensus Estimate and prior-year earnings by
3.5% and 2.4%, respectively. Decent sales growth was offset by
weak profits to result in the earnings shortfall.
Revenues increased 2% to $1.48 billion benefiting largely from
pricing. Operating profit declined 1% in the quarter. Overall, Dr
Pepper has had a dismal 2012, missing Zacks estimates for both
revenues and earnings while just managing to meet company
expectations for the year. Moreover, Dr Pepper expects earnings
to slowdown in 2013 due to higher expenses associated with a
national launch of the TEN platform.
Following the weak fourth-quarter results and expected
slowdown in earnings in 2013, estimates largely moved downwards
for 2013 and 2014. The Zacks Consensus Estimate declined by 4% to
$3.07 while that for 2014 reduced by 3.5% to $3.33 over the last
Moreover, the company's weak carbonated soft drink (CSD)
volume growth and lack of exposure outside the U.S. is
concerning. Changing consumer preferences, increasing health
consciousness, rising obesity concerns, possible new taxes on
sugar-sweetened beverages and growing regulatory pressures are
affecting the company's CSD sales. 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 exposure outside the U.S.
Despite these 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
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 time to
deliver substantial results.
Other Stocks to Consider
Dr Pepper carries a Zacks Rank #3 (Hold). Another stock in the
beverage industry that is currently performing well is
Coca-Cola Hellenic Bottling Company S.A.
) - with a Zacks Rank #2 (Buy).
COCA COLA HELNC (CCH): Free Stock Analysis
DR PEPPER SNAPL (DPS): Free Stock Analysis
COCA COLA CO (KO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
To read this article on Zacks.com click here.