The Year That Was: Dr Pepper Snapple

DPS: Dr Pepper Snapple logo
DPS
Dr Pepper Snapple

Dr Pepper Snapple (NYSE:DPS) has had a stellar 2015. Its stock has grown by over 30% year-to-date, beating the overall S&P 500 Index, which remained flat, and also the single-digit percentage growths of The Coca-Cola Company (NYSE:KO) and PepsiCo‘s (NYSE:PEP) stocks. Dr Pepper has grown both its carbonated and non-carbonated beverage businesses in the U.S., which accounts for almost 90% of the company’s top line, as well as increased profits in Mexico and the Caribbean despite the negative impact of currency translations.

We have a price estimate of $97 for Dr Pepper Snapple, which is above the current market price.

See Our Complete Analysis For Dr Pepper Snapple

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Dr Pepper has been able to extract growth from the relatively mature U.S. carbonated soft drinks (CSD) market dominated by Coca-Cola and PepsiCo, which hold a combined share of 70%. The brand Dr Pepper remained flat in Q3, with regular Dr Pepper growing 2% and Diet Dr Pepper declining 4%. Both the 2% gain in regular and 4% decline in diet represents better than overall category performance. And come 2016, there is still more room for Dr Pepper to grow — in terms of pricing. The company’s price mix is still lower than that of Coca-Cola and PepsiCo, both of which have gained from the introduction of several smaller packages, which have higher prices per unit. A very small percentage of Dr Pepper’s bottle can volume in the U.S. is in the small cans, such as the 8 ounce and 8.5 ounce packs. The customer is moving towards smaller bottles and cans, which contain lower cumulative calories, and so is the company. Dr Pepper might be late to arrive at the party, but if and when it does, it will have more room to grow.

Q1-Q3 coke pepsi dr pepper

CSDs aside, Dr Pepper is finding growth in non-carbonated beverages, which although form roughly 20% of the net volume sales for the company, are growing at a fast pace, as customers continue to ditch sugary sodas in favor of alternatives such as sports and energy drinks, ready-to-drink (RTD) tea and coffee, and bottled water.

A high growth category for Dr Pepper is RTD tea, which although forms only 4% of the U.S. beverage industry as of now, is expected to grow at a CAGR of 5% at constant 2014 prices, to reach sales of $6.6 billion by 2019. [1] In comparison, CSD volume sales are expected to remain flat or grow by less than 1%, at best. The Pepsi-Lipton Tea Partnership led the RTD tea segment in off-trade value terms in 2014, with a share of 25%, followed by AriZona Beverage Company, which has a share of 24%. Dr Pepper’s Snapple tea brand ranks third in this segment, and has been growing at a brisk pace.

 

What’s working well for the company is that the Snapple brand is accretive to the overall margins due to the increased focus on premiumization of this brand. Snapple volumes fell in the early part of last year, as the company de-prioritized the value line, which typically formed around 10% of the brand’s net unit sales. However, Snapple’s volumes rose in Q3 and Q4 last year, and continued to grow through Q3 this year, rising by 7% year-over-year. This bodes well for the company, as despite de-emphasizing focus on its value line, Snapple volumes have increased.

In addition, the bottled water segment is voluminous and promises growth. Through the first three quarters, Dr Pepper’s water portfolio grew by 11%, on the back of growth for Bai 5 and Fiji, which were partially offset by declines in Aguafiel. The U.S. is the fastest growing bottled water market outside Asia, and forms around 35% of the country’s liquid refreshment beverage market.

Dr Pepper is deriving high volume growth from its allied brands, which is expected to continue into 2016. In fact, with more cash in hand, Dr Pepper might look to invest in other smaller brands with growth potential, like its $20 million investment in the Gatorade rival sports drink brand BodyArmor this year. The allied brands growth is included in the packaged beverage volumes for Dr Pepper, which is the distribution wing for these small but fast growing brands, such as Bai 5, Vita Coco, etc. At the gross margin line, the allied brands tend to carry lower gross margin because they have somebody else’s manufacturing profit in there, but are good contributors to Dr Pepper’s operating profitability. Allied brands from a small proportion of net volumes at present, but are an important factor of growth.

Q4 is not expected to reveal any new trend, and Dr Pepper is expected to end 2015 on a sound note. Despite the threat of the strengthening U.S. dollar, the company remains relatively unexposed, as most of its sales are concentrated in the home market. In addition, despite a substantial 15 percentage point currency headwind on the top line in Latin America, which wiped out the 9% year-over-year rise in organic sales through Q3, Dr Pepper managed a 15% increase in segment operating profit. This was on the back of the high volume growth, and lower input, SG&A and commodity costs, which are realized in local currencies. Thus, the stronger U.S. dollar proved to be favorable in this case.

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Notes:
  1. RTD tea in the U.S., euromonitor.com []