Dr Pepper Pre-Earnings: Expect Strong Organic Growth In The Domestic Market

The third largest carbonated soft drinks (CSD) manufacturer in the U.S., Dr Pepper Snapple (NYSE:DPS), is scheduled to announce its Q1 results on April 23. The company outperformed both its chief competitors The Coca-Cola Company (NYSE:KO) and PepsiCo (NYSE:PEP) in terms of top line growth last year, reporting a 2% year-over-year growth in net sales. This is mainly as Dr Pepper, which depends massively on its performance in the U.S., is relatively less exposed to the risk of currency depreciation in international markets. Around 88% of Dr Pepper’s net sales came from the U.S. last year, with 4% from Canada, and the rest, 8%, from Mexico and the Caribbean. A strengthening U.S. dollar against the Canadian dollar and Mexican peso is expected to be only a 1 percentage point headwind on net revenues and a 2 percentage point headwind on operating income this year. On the other hand, negative currency translations are expected to drag down Coca-Cola and PepsiCo’s top line by 5 and 7 percentage points respectively in 2015.

We have a price estimate of $78 for Dr Pepper Snapple, which is roughly in line with the current market price.

See Our Complete Analysis For Dr Pepper Snapple

Dr Pepper is hugely dependent on its domestic market, and a strengthening economic environment in the country, with improving customer purchasing power due to low oil prices and a jobless rate under 6%, could have resulted in higher sales for the company this quarter. In 2014 as well, when the U.S. CSD market declined for the tenth consecutive year, Dr Pepper was able to increase its market share on flat year-over-year volume growth, while both Coca-Cola and PepsiCo’s CSD volumes and market shares fell. In fact, the staple Dr Pepper drink grew volumes by 0.5%, outperforming both Coke and Pepsi-Cola, and consolidating its position as the fifth-highest-selling soft drink in the U.S. ^[1] This trend could continue this quarter, and as approximately 80% of Dr Pepper’s net volume is CSDs and most of the sales are from the domestic market, a rise in U.S. soft drink sales could lift the overall results for the company.

Apart from being able to achieve volume growth in an otherwise mature U.S. CSD market, Dr Pepper might be able to further boost its top line through positive mix. Average revenue per unit could also rise as beverage makers have increased their retail prices on improved economic conditions in the country. The consumer-price index for nonalcoholic beverages grew in each of the months through December-February. ^[2] There is even more opportunity for Dr Pepper to boost its revenue growth, as the company’s pricing is still lower than its peers. A positive mix is what fueled top line growth for the company last year more than positive pricing. Dr Pepper is not completely in the smaller packages segment, which has been a growth driver for both Coca-Cola and PepsiCo in terms of higher price per unit in the recent quarters. This means that Dr Pepper has further growth opportunities when it comes to CSDs, and could emphasize more on smaller packages and further raise its product prices to spur revenues, even as volume growth could remain somewhat tepid.

Moving away from CSDs, Dr Pepper’s non-carbonated segment could grow on the back of strong sales for the ready-to-drink tea brand Snapple, but this growth might be offset by lower sales for Hawaiian Punch and Mott’s. Non carbonated beverage (NCB) volume declined 1% for Dr Pepper in 2014, mainly due to the volume declines in Q1 and Q2, but the company now expects this segment to contribute to growth going forward. As consumers look to avoid  sugar and calorie-fueled carbonated drinks, volumes for healthier non-carbonated beverage segments such as sports drinks, bottled water, natural juices, and RTD tea have been rising. Dr Pepper’s much needed NCB growth could come from Snapple in Q1.

Dr Pepper’s overall still beverage volume sales declined in Q2 as Snapple volumes fell, as the company de-prioritized the value line, which typically formed around 10% of the brand’s net unit sales. However, in Q3 and Q4, Snapple’s volumes rose to fuel growth in the overall category. This bodes well for the company as despite de-emphasizing focus on its value line, Snapple volumes have increased. The Snapple premium business grew mid-single-digits in 2014, boosting the top line. Just like flavored bottled water, RTD tea is also a segment of the U.S. beverage industry that is growing at a fast pace, due to a healthier, more natural, perception. But unlike in bottled water, where margins are thinner, RTD tea, and in particular the premium products, are more profitable. By leveraging the high demand for tea and Snapple’s strong brand recognition, Dr Pepper could continue to increase volumes. The company is also launching a new line of unsweetened and slightly sweetened teas called Snapple Straight Up Tea, further penetrating the RTD tea segment. Dr Pepper could earn higher net revenues in Q1 from the tea segment on favorable product mix, due to the company’s focus on the more profitable premium brands.

Last word on Dr Pepper’s pre-earnings expectations is on its Latin America operations. Mexico and the Caribbean formed only 8% of Dr Pepper’s sales last year, but they are the main growth drivers for the company. While sales in the U.S. grew only 1% in 2014, and declined 1% in 2013, Latin America sales rose 15% and 11% in 2014 and 2013, respectively. The company is cycling the introduction of the sugar tax in Mexico this quarter, which was imposed last year in January, and so there shouldn’t be a significant year-over-year change in average revenue per unit and operating costs due to the tax. Volume sales in Mexico kept rising for Dr Pepper despite the soda tax in the last few quarters, but seeing how approximately half the country’s population lives below the poverty line, there is always a fear that higher product prices owing to the passing of a tax could drag-down demand for soft drinks.

This quarter, apart from a slight rise in CSD sales in the domestic market, Dr Pepper’s non-carbonated drink sales could also grow, and Snapple will be key to this anticipated growth.

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1. U.S. beverage business results for 2014 [↩]
2. Consumer Price Index- March 2015 [↩]