Dr Pepper Snapple Earnings Preview: What We’re Watching

Dr Pepper Snapple’s (NYSE:DPS) performance over 2012 has been marked by a slowdown in top-line growth as an increasing number of consumers in North America are turning away from carbonated sodas and towards healthier alternatives. Meanwhile, a challenging commodity cost environment has weighed on the company’s bottom-line, which DPS has mitigated to some extent by stronger pricing and effective hedging strategies. The company is expected to release its Q4 2012 results on February 13, and we expect modest results despite significant volume headwinds. A mix of stronger pricing and an easing commodity scenario should see the company achieve its annual earnings target for the year.

See full analysis for Dr Pepper Snapple

Declining Consumer Demand To Remain A Key Worry

Although North America remains the largest market for carbonated soda drinks in the world, per capita consumption has been on the decline for the past few years. With consumers moving towards healthier options such as juices and energy drinks, volume sales of sodas in the US fell by 1.8% in 2012. ^[1] More worryingly for investors, the slowdown got worse as the year progressed and that means DPS’s Q4 results might bear the brunt in this regard. DPS has not really expanded its portfolio beyond the fizzy drinks segment while depending mostly on the North American region for soda sales. DPS’s lack of product and geographic diversity places it at a distinct disadvantage compared to competitors such as PepsiCo and Coca-Cola.

Stronger Pricing To Mitigate Volume Loss

Total volumes for DPS were down by 3% during Q3 2012. The company relied on a net 4% increase in pricing to maintain net sales, which finished even with the Q3 2011. We expect this trend to play out strongly over the final quarter, especially considering the company’s full year guidance of a 2% increase in net sales in 2012.

Easing Commodity Prices To Boost Margins

Easing commodity prices helped DPS realize gross margins of 59% in Q3 2012 compared to 56% in the year ago period. With the commodity price environment continuing to ease towards the latter half of the year, investors can expect the company’s earnings to receive a real bottom-line boost in Q4.

A combination of stronger pricing and easing commodity prices should see the company post a reasonable increase in EPS over the final quarter with the company’s own annual target in the $2.90-$2.98 range compared to $2.74 in 2011.

We currently have a price estimate of $46 for Dr Pepper Snapple, which is in line with the market price.

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1. “Soda Revenue Goes From Flat to Sour“, January 2013, Wall Street Journal [↩]