?
Dr. Pepper Snapple Group Inc. (DPS: Charts, News, Offers), the soft drink company whose brands include 7-Up, Snapple, Sunkist, A&W, Mott’s, Welch’s, Schweppes, Canada Dry and many others reported earnings on Thursday, which initially seemed positive beating the Street consensus of 69 cents EPS at 74 cents. It reported a 15% increase in operating profit, an increase to $183 million from $158 million. The company reaffirmed 2010 guidance but its sales increase of 2.6% (1.52 billion) disappointed many analysts, who expected the company to come in at above 1.53 billion to continue its growth trend. This caused shares to fall as much as 4.45% on Thursday, but rebounded to 37.11 on Friday morning. Has this once hot soda stock, fizzing to the brim at 40.24 last week from a 52-week low of 23.30, gone flat?
Daily Chart
Stock Analysis
The most important headlines for DPS this year were two massive distribution deals with Coca-Cola and Pepsico. Coca-Cola and Pepsico are currently moving to buy out their own bottlers, an incredibly expensive move, to increase direct profit and eliminate the regional middlemen altogether. This move echoes Cadbury Schweppes’ earlier move to buy out Dr. Pepper/Seven Up Bottling. This affects Dr. Pepper Snapple directly; with the two giants taking up bottling positions, they need Dr. Pepper Snapple’s extensive line of American beverages to bolster their regional and global product lines. That’s why Coca Cola and Pepsi paid $715 million and $900 million, respectively, for the rights to distribute Dr. Pepper Snapple products through their newly acquired bottling divisions for 20 years. Rather than taking on the two giants directly, Dr. Pepper Snapple has taken on a decisively more tactical move to ride on their coattails, a conservative move with short to mid-term profitability.
Net profit margin dropped from 10% to 7.13%, which is not impressive compared to Coca Cola’s 27.46% (up from 22.28% in 2009). However, we should also take into account Dr. Pepper’s status as a bottler, whereas Coca Cola is still mainly a concentrates manufacturer. Bottlers generally have a much lower profit margin than manufacturers. When we compare DPS net profit margins to Coca Cola Bottling’s (COKE: Charts, News, Offers) margins – 1.48%, down from last year’s 2.64%, a more forgiving picture emerges.
In North America, Dr. Pepper Snapple’s’ primary market, soft drinks sales have slowed since 2002 due to health concerns. Many of these concerns were exacerbated by documentaries such as “Super Size Me” and news reports of widespread obesity and health problems caused by American sodas. There is now a growing market for sports and energy drinks, as well as bottled water. Several states, most notably New York and Maine, have proposed heavy excise taxes of 18% on non-diet sodas and juice beverages containing less than 70% fruit juice.
Dr. Pepper has a severe handicap when it comes to the new health-oriented North American consumer. At the end of 2008, a joint venture by Coca-Cola and Pepsico to create the “zero-calorie sweetener” from the stevia plant succeeded with FDA approval. These two products, called TruVia and PureVia, respectively, are forecast to revitalize the stagnant soft drink industry’s outlook. DPS did not participate and won’t be able to use the stevia sweetener in its products, giving it a distinct technical disadvantage.
Instead, Dr. Pepper Snapple relies on deals like the aforementioned near-billion dollar deals with the two cola giants for contracts that lock them in for 20 years at a time. If Coca-Cola and Pepsi buy out both their North American and global bottlers, then through their distribution deal with Dr. Pepper Snapple bring out their extensive beverage lineup across the world under the Coca-Cola umbrella, they will reap the fruits of their investments in Dr. Pepper, while Dr. Pepper gets none of that final cut. DPS, however, currently has no other choice. Its 9 billion market cap is dwarfed by Coca-Cola’s monstrous 127 billion and Pepsico’s 103 billion, and it is ill-equipped to spread itself as far as Asia. The shrewd tactic now is to keep its product line significant and essential to Coca-Cola and Pepsico.
With a large cash hoard, DPS has made clear that it intends to increase shareholder value – first by boosting the quarterly dividend 67% to 25 cents per share back in May and then announcing a $1 billion stock buyback in July. Neither is a creative use of cash, but it shows that they are appealing to new investors.
DPS is the third largest soft drink company in the United States, accounting for 15% of the market with room to grow in its strong markets – North America, Canada, Mexico and the Caribbean. The stock currently trades at $37.12 with a trailing P/E of 18.56 and a forward P/E of 13.29. If we are to still believe DPS is a growth stock, then a PEG ratio of 1.37 is decent, though not significantly undervalued. DPS has been on fire for a long time and this may be the pullback investors have been waiting for, considering the average analyst target price is still in the low to mid-40s.
DR PEPPER SNAPPLE GROUP INC rated Buy with price target $41 by Stifel Nicolaus
Picket Line Against Dr Pepper Snapple Group Extended to National Fruit Product Company, Inc. in Winchester
New Trend Development for Dr Pepper Snapple Group
Other Stocks in the News:
Flagship’s Growing Margins Mean Little For Pepsi (PEP: Charts, News, Offers)Shares
Coca-Cola (KO: Charts,
Other relevant articles you may like
Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
