On Mar 26, 2014, Dr Pepper Snapple Group Inc. (DPS) reached a 52-week high of $53.72 as the share price has been on the rise ever since it reported strong fourth-quarter fiscal 2013 results on Feb 12.Dr Pepper currently carries a Zacks Rank #2 (Buy).
Why the Increase in Share Price?
On Feb 12, the beverage company’s adjusted earnings of 97 cents per share beat the Zacks Consensus Estimate by 14.1% despite significantly weaker volumes. Moreover, earnings increased 18.3% year over year due to pricing/productivity gains, lower taxes and a LIFO inventory benefit. Both gross and operating margins also improved in the quarter. However, sales continued to be soft, missing the Zacks Consensus Estimate by 1.4% and declining 1% year over year due to weak carbonated soft drinks (CSD) volumes and slow consumer spending environment.
Though the company’s volumes are suffering due to CSD category headwinds, it has consistently delivered strong bottom-line results helped by its cost savings initiatives. Its Rapid Continuous Improvement (RCI) launched in 2010, recorded cash productivity savings of $169 million through 2013, much ahead of management’s expectations of $150 million. In fact, Dr Pepper has beaten estimates in three out of the last four quarters, posting an average earnings surprise of 10.97%.
Dr Pepper expects the bottom-line strength to continue in 2014 as well. For full-year 2014, adjusted earnings per share are expected in the range of $3.38 to $3.46, representing a positive growth from 2013 levels. Price/Mix and productivity gains and lower input and marketing costs are expected to drive earnings offsetting weaker volumes and higher transportation and people costs.
Moreover, Dr Pepper is trying to reinvigorate its CSD volumes through low-calorie versions of its popular brands like Dr Pepper, 7UP, Sunkist Orange Soda, A&W Root Beer, Canada Dry Ginger Ale and RC Cola. The 10 calorie drinks have gained decent success, bringing new as well as lapsed consumers back to the category.
The company also enjoys solid fundamentals — a strong position in the flavored CSD market, efficient cost management and regularly returning cash to shareholders. Moreover, its priority brand agreements with beverage giants, The Coca Cola Company (KO) and PepsiCo, Inc. (PEP) ensure that the popular brands of Dr Pepper are included in all core packages, major merchandising events and display activities that companies participate in, thus boosting the sales of Dr Pepper’s brands.
Other Stocks to Consider
Another beverage stock worth considering is Monster Beverage Corporation (MNST) carrying the same rank as Dr Pepper.