Dr Pepper Snapple (NYSE:DPS) will announce its Q3 earnings on October 24. The stock has gained more than 10% since the start of the year and its dividend yield of 3.1% makes it an attractive stock in a low interest rate environment. The beverage company operates only in the North American region and therefore has avoided the slowdown in Europe. Recently, the company also forged a deal with Green Mountain Coffee Roasters Inc (NASDAQ:GMCR) which will soon make Snapple available in Keurig K-cups and V-packs. Here’s what you can expect from the upcoming earnings.
Flat Soft Drink Volumes
Soft drink contribute more than three-fourth to the stock price as per our estimates. Overall, the soft drink market is declining at the rate of 1-2% annually in the U.S. However, DPS has been able to extend its market share due to marginal volume gains in the last few years helped by an expanded distribution network and the introduction of new products.
The company also added 43,000 fountain valves and 22,000 cold drink points in 2011. DPS also has bottling agreements with PepsiCo and Coca-Cola which give the company a greater foothold in the North American markets. The agreements were formed in 2010 for a period of 20 years and give the company access to areas which have typically had low per-capita consumption of DPS brands. The company also launched a mid-calorie version of its flagship drink Dr Pepper TEN in the fourth quarter of 2011 which has been partly responsible for the volume gains. 
In the non-carbonated segment, only Snapple has performed consistently for the company in the last few years. Other brands have seen consistent volume declines due to higher than expected increase in the cost of sales which were ultimately passed on to the consumers. In the first six months of the year, Snapple’s volume has increased 3% while Hawaiian Punch and Mott’s volumes have declined 21% and 10% respectively. Overall, non-carbonated volumes are down 7% through June and we expect this trend to continue.
Margins to Remain Steady
For the first six months of 2012, the cost of raw materials was 42.5% of revenues, up 1% from the same period last year. However, a major chunk of this is attributable to the excessively high cost of sales in the first quarter and the company’s margins actually improved in the second quarter (y-o-y). Furthermore, DPS now expects the cost of raw materials to rise by 2% only (down from the previous forecast of 7-9% at the start of the year) and therefore the margins should stabilize going forward. 
We currently have a price estimate of $44.9 for Dr Pepper Snapple, which is in line with the market price.Notes: