On Sep 4, 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 Kept at Neutral?
Dr Pepper's second-quarter 2013 (results announced on Jul 24)
adjusted earnings of 84 cents per share were in line with the
Zacks Consensus Estimate. However, earnings decreased 1% year
over year due to weak top-line performance as well as sluggish
Net sales declined 1% year over year and missed the Zacks
Consensus Estimate as gains from positive price/mix were offset
by weak volumes. Both gross and operating profits declined due to
weak sales, increased commodity costs (especially apple and corn)
and higher marketing spend. Moreover, the company lowered its
2013 top-line guidance.
Volumes were hurt by the difficult operating conditions faced
by the carbonated soft drinks (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
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.
Following the weak second-quarter results and the lowered
sales outlook for the year, the Zacks Consensus Estimate mostly
moved downwards. The Zacks Consensus Estimate for 2013 decreased
0.3% and that for 2014 went down 0.9% over the last 60 days.
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
Moreover, following the success of the low-calorie version of
its Dr Pepper brand of soft drinks, Dr Pepper TEN, the company
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. early 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 for the company
versus peers like
The Coca Cola Company
) that 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
Pinnacle Foods Inc.
), carrying a Zacks Rank #1 (Strong Buy).
DR PEPPER SNAPL (DPS): Free Stock Analysis
COCA COLA CO (KO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
PINNACLE FOODS (PF): Free Stock Analysis
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