Mexican Woes For Dr Pepper Snapple: Lower Profit Forecast

DPS: Dr Pepper Snapple logo
DPS
Dr Pepper Snapple

Latin America is an important region for Dr Pepper Snapple (NYSE:DPS), with nearly 5% of its total sales coming from this segment. Mexico accounts for 90% of the company’s beverage sales in Latin America and given that the per capita consumption of carbonated soft drinks (CSD) is the highest in Mexico (compared to any other country in the world), the region holds strong growth potential for Dr Pepper Snapple. According to our estimates, the Latin American beverages segment accounts for nearly 7% of the company’s valuation and given its high dependence on CSDs for revenues, this region is critical for its revenue growth.

See Our Complete Analysis For Dr Pepper Snapple

Uncertainty Over Mexico Depreciating Currency

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Given the recent policy decisions by the Trump administration around Mexico, Dr Pepper Snapple is likely to be impacted by the uncertainty prevailing around the region. The company expects its profitability in 2017 to be negatively impacted by the depreciation in the Mexican Peso.  The company expects a 14% depreciation in the Peso for 2017, impacting its earnings per share negatively. We expect the company’s Latin American volumes to grow steadily over our forecast period and reach nearly 600 million by the end of our forecast period.

This estimate is based on the fact that the Mexican non-alcoholic beverage market is expected to grow at a CAGR (compounded annual growth rate) of nearly 5.5% throughout 2015-2018, which is much higher than the growth rate in the U.S.  Dr Pepper Snapple has invested significantly in the region with higher marketing spend and investments in the information technology infrastructure and we expect volumes to grow as these investments fructify.

However, as the Mexican Peso depreciates a higher devaluation can force the company to increase its beverage prices locally in Mexico, which can negatively impact its volumes in the region. A slower growth of volumes in Mexico can lead to a downside in our price estimate for the company.

While several companies fear a negative impact on their revenues and profitability due to the uncertainty prevailing over Mexico, Dr Pepper Snapple has quantified the impact of a depreciating currency on its EPS for 2017. Mexico is a significant region for the company, given the high consumption of CSDs in the region and the declining soda sales in the U.S.  Dr Pepper Snapple depends heavily on CSDs to generate revenues and its sales are concentrated in the U.S. and Latin America. With limited diversification into non-carbonated beverages and no significant presence in emerging markets, uncertainty in Mexico and the depreciating Peso can impact the company’s growth and revenue prospects in the near term.

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