Is Dr Pepper Snapple Fizzling out?

Is Dr Pepper Snapple Fizzling out?

US consumers are shifting away from carbonated soft drinks and moving toward healthier and more natural alternatives. Under such challenging circumstances, will Dr Pepper Snapple Group continue to feel the heat or will it manage to out-maneuver this declining trend? Let's analyze Dr Pepper Snapple and also have a look at Monster Beverage and National Beverage .

Third-quarter report In the third quarter, Dr Pepper Snapple Group posted earnings per share of $0.88, increasing 11% from the comparable quarter last year. The earnings topped Zacks' estimates by 6% as the analysts expected earnings per share of $0.83.

Higher earnings were attributed to LIFO inventory benefit, continuous productivity improvements, and pricing gains. As part of its productivity improvement plan, Dr Pepper Snapple reduced its labor costs that resulted in more cost-efficient plants for the company. The surge in profit, however, was not due to increased business activity which is a matter of concern as such profit cannot be sustained for a long period of time.

The company's net sales increased by 1% from the comparable quarter last year to $1.54 billion. Sales volume went down by 1% while price-mix increased by 3%. Gains from positive pricing were partly offset by the decline in sales volume mentioned above. Sales were down as a result of changes in consumer preferences as people continued to move away from carbonated soft drinks.

Dr Pepper Snapple's overall sales volume slipped by 1% in the quarter. Sales for CSDs were flat as the increase in sales of Canada Dry was offset by declines in other products. This signifies consumers' aversion from carbonated soft drinks. Even the company's flagship product, the Dr Pepper cold drink, suffered a 1% decline in volume.

What is DPS up to? Recently Bai Brands and Dr Pepper Snapple Group announced a major distribution agreement. The two companies have been working together in select markets for the past two years. After this agreement, the two companies will partner with each other in all of their major markets in the United States. Dr Pepper Snapple will be distributing Bai Brand's line of five-calorie, all-natural, anti-oxidant infused beverages throughout the country.

Earlier this year, Sunny Delight Beverages, or SDBC, chose Dr Pepper Snapple as its distribution partner for the national launch of its new Sparkling Fruit20 fruit flavored water. The sparkling water category has experienced 37% growth from last year and SDBC will try to capitalize on this through Dr Pepper Snapple's efficient and nationwide distribution network.

As consumers become more health-conscious, this has taken a toll on Dr Pepper Snapple's sales. However, the company has a vast distribution network through which it can earn and offset the declining soda sales to some extent. These two distribution agreements reiterate the success of Dr Pepper Snapple's large distribution channels which are among the biggest strengths of the company.

Future outlook The company has reaffirmed its earnings per share guidance for the year of 2013 but it reduced its revenue guidance because of the continued pressure on the carbonated soft drinks industry. Previously, a 2% rise in sales was expected, while now sales are anticipated to remain flat. Dr Pepper Snapple has revised its sales guidance twice within the same fiscal year which shows that the company's management is not very optimistic about the future prospects of its products.
I believe that Dr Pepper Snapple is a value stock as it has a price-to-sales ratio of 1.59 which is lower than the industry average of 2.53. The company has a lower price-to-book value of 4.16 than the industry average of 8.44, which strengthens my belief that its stock price will increase in the future. While taking a look at price-to-free cash flow ratios, we see that the company has a lower price-to-free cash flow ratio of 27.52 than the industry average of 29.68 which shows that the company's stock is undervalued right now.

Competitors Monster Beverage had a disappointing third quarter as its earnings and revenue both missed Zacks estimates by 7% and 1.4%, respectively. EPS increased by 13.1% from the last year to $0.53 per share while revenue jumped 8.9% from the previous year to $590.4 million this year. The demand for the company's products was soft and the introduction of new products cannibalized sales of existing ones. Also, the poor performance of the company in terms of earnings has been partially blamed on the higher cost of professional services incurred by the company.

National Beverage also had a dismal recent quarter with earnings per share dipping by 16% from the previous quarter to $0.26 per share in this quarter. Revenue also decreased 6% to $172 million. The CEO of the company, Nick A Caporella, refused to give a reason for the dismal performance and stated that it would not make any difference in the results. The reason for this decline, however, is changing consumer preferences as consumers move away from carbonated soft drinks.

Final thoughts Dr Pepper Snapple Group is facing some difficult times. The company posted higher than expected profits but those profits did not stem from the expansion of its core business operations as its sales volume declined. Instead, the earnings jump was a result of a higher pricing mix and favorable accounting practices. DPS has a limited geographical presence as it is limited to the Americas, therefore, it has been exposed to the bumps in the US soda market which is a big disadvantage for the company.

The company has twice revised its revenue guidance within the same year which indicates that management has not been able to come up with a solution to stop the company's dwindling sales. Although the company's stock is undervalued right now, I believe that bigger fish like PepsiCo and Coca-Cola provide superior investment opportunities in comparison with Dr Pepper Snapple Group. Taking all of this into consideration, I believe that Dr Pepper Snapple Group does not present an ideal investment opportunity at this point in time.

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Zahid Waheed has no position in any stocks mentioned. The Motley Fool recommends Monster Beverage. The Motley Fool owns shares of Monster Beverage. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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