Why Have Dr Pepper Snapple’s Shares Disappointed This Year?

DPS: Dr Pepper Snapple logo
DPS
Dr Pepper Snapple

While shares of non-alcoholic beverages have given good returns this year, those of Dr Pepper Snapple (NYSE:DPS) have disappointed immensely. Although the massive returns given by Monster Beverage and National Beverage Corp could have been expected, gains provided by DPS’ shares have lagged behind even those of Coca-Cola and PepsiCo’s. The main reason that can be adjudged to have caused this is the uncertainty surrounding the purchase of Bai Brands. Moreover, a default by a supplier of resin to DPS’ factory in Mexico also forced the company to lower its earnings guidance.

We have a $97 price estimate for Dr Pepper Snapple, which is higher than the current market price. The chart above has been made using our new, interactive platform.

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Reservations Regarding Bai Brands

The fact that the purchase of Bai Brands is the first major deal by Dr Pepper Snapple as a standalone company is showing now, as the company modified the impact of the purchase on the earnings for the fourth time since announcing the acquisition. The volume growth forecast for the year has been reduced from a range of 40%-50% to about 40%, and the brand is expected to add 1 percentage point to the net sales growth, from 2 percentage points earlier. Moreover, the impact of the Bai acquisition is expected to be $0.11 dilutive to the core EPS, from an original estimation of $0.02. DPS does not have the experience of buying a smaller brand such as Bai, whose sales are growing at a fast rate. The company has also invested enormously in Bai’s advertising, promotion, and distribution strategy, which has also been pressuring the margins. In the third quarter alone, $20 million was spent for these purposes. A similar amount can be expected to be expended in the fourth quarter as well, with a cutback to be witnessed in the next financial year.

One factor that could be causing the slow growth of the brand, is that earlier DPS relied on volume expansion by selling cases to companies such as Costco and Wal-Mart’s Sam’s Club. However, the company is now focusing on acquiring retail grocery shelf space, where sales are usually more individualized, and not in bulk. The main reason cited for this was the highly promotional environment in such club stores. In the third quarter of 2016, the club channel mix was 31%, which has dropped to 26% year-to-date this financial year. While this strategy, in the long run, will prove to be more fruitful for the company, as it encourages trials and samplings, in the short run, its unforeseen impact resulted in an over-optimistic results prediction.

Bai’s Tremendous Potential

Through the acquisition of this brand, DPS aims to be the leader in the healthy beverages segment. As millennials move away from carbonated soft drinks, demand for healthier options is increasing, and Bai is likely to be the front-runner for DPS in terms of healthy beverage options. Moreover, from an ACV (all-commodities volume) standpoint, while there are still distribution opportunities for its enhanced water product, greater opportunities lie in other platforms, such as Bubbles, Super Tea, and Black. ACV is considered an insightful measure for soft drinks companies, and can be generally thought of as “% of stores selling,” but with stores weighted based on their size, and hence, reflects the item’s exposure to consumer spending.

Bai is known for its disruption in the beverage industry and its entrepreneurial structure has allowed the company to innovate in the healthy beverage segment. Over the past two years, the brand introduced fruit-based carbonated beverages and a better-for-you soda called Bai Black. Another factor that may boost the sales of this brand is the imposition of soda taxes in a number of cities in the US. With the presence of antioxidant-infused fruit beverages in Bai’s portfolio, DPS will be in a better position than other beverage companies to tide over this storm.

See Our Complete Analysis For Dr Pepper Snapple

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Dr Pepper Snapple

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