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Dr Pepper Snapple: Top Line Shows Strength, Currency a Drag

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On Mar 7, we issued an updated research report on one of the leading beverage company - Dr Pepper Snapple Group Inc. .

Aggressive marketing campaigns, pricing gains, innovation and productivity improvements are doing the tricks for Dr Pepper. Also, shares of the company gained over 2%, comparing favorably with the Zacks categorized Beverages-Soft Drinks industry’s decline of 0.2% over the last one year. However, weak volumes of carbonated beverages and foreign currency translation raise caution.



Recently, the company announced fourth-quarter adjusted earnings per share which missed the Zacks Consensus Estimate by 1.9%. However, earnings increased 4% year over year, courtesy of strong top-line growth. Net sales of $1.578 billion were almost in line with the Zacks Consensus Estimate and rose 2.1% year over year as favorable product/package mix, price hikes and sales volume offset currency headwinds.

Upside

The Rapid Continuous Improvement ("RCI") program has led to strong earnings growth. Through the program, the company has been able to reduce inventory and storage costs and improve cash flow, which can be returned to shareholders via dividends and share repurchases and be re-invested in the business to boost top-line growth.

Dr Pepper’s priority brand agreements with PepsiCo, Inc.(PEP - Free Report) , The Coca Cola Company (KO - Free Report) and Bai Brands make certain that its popular brands are included in all core packages, major merchandising events and display activities that these companies participate in, thus boosting sales of its brands.

Dr Pepper continuously focuses on introducing new products/flavors in view of the changing preferences of consumers. Recenlty, the company added the “Takes 2 To Mango Tea” drink to the Snapple Tea Portfolio. Further, Dr Pepper will continue to leverage on the strong growth in the ginger ale category, courtesy of its new ‘Canada Dry’ campaign.

Downside

Although the majority of the company’s net sales, expenses and capital purchases are transacted in U.S. dollars, it has exposure to Canadian dollar and Mexican peso as well. Foreign exchange proved to be a 1% headwind for revenues in 2016. Foreign currency translation is expected to impact core EPS by 11 cents in 2017.

The company mainly operates in the U.S., Canada and Mexico. It lacks exposure in the fast growing emerging markets where demand is strong.

Overall, the company has been witnessing persistently weak volumes of carbonated beverages due to CSD category headwinds. The company expects flat volume growth in the CSD category in 2017.

Estimate Revision

The company’s recent earnings estimates have been discouraging. The current quarter’s consensus estimate has dropped 5.9% in the past two months, while full-year estimates moved 2.7% lower.

Notably, the stock has a long-term expected earnings growth projection of 9.5% and carries a Zacks Rank #3 (Hold). These mixed expectations indicate that while the stock’s growth story might be good over the long term, analysts have some apprehensions about the stock in the immediate future.

A Key Pick

A better-ranked stock in the same space is Coca-Cola Amatil Ltd. , with a Zacks Rank #2 (Buy). It has a long-term expected earnings growth rate of 10%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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