On Apr 10, we maintained a Neutral recommendation on Dr Pepper Snapple Group Inc. (DPS - Analyst Report) due to our faith in its long-term fundamentals, despite weak fourth-quarter results.
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 60 days.
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 (KO - Analyst Report) and PepsiCo, Inc. (PEP - Analyst Report) , 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 (RCI) program.
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).