All Eyes On The Dr Pepper Snapple – Keurig Green Mountain Deal In The Former’s Fourth Quarter Results Announcement

by Trefis Team
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Dr Pepper Snapple (NYSE:DPS) is scheduled to report its fourth quarter earnings on February 14. Analysts have forecast an EPS of $1.16 per share, and revenues of $1.66 billion, reflecting an over 11% improvement in the former and about 5% growth in the latter. DPS had a tepid third quarter wherein it missed expectations on both sales and earnings. Factors such as the early extinguishment of debt, hurricanes and earthquake in the US and Mexico, and a resin supply issue played a dampener on the earnings. The sales growth was driven by the acquisition of Bai Brands, as well as a favorable product and package mix, which is again expected to boost the revenues. As per the company’s full-year guidance, it expects the core EPS to come in the $4.50 to $4.57 range. The impact of the Bai acquisition is estimated to be $0.11 dilutive to the core EPS, from an expectation of $0.07 earlier. However, what investors will be most looking forward to in the earnings call is an update regarding the proposed acquisition of Dr Pepper Snapple by Keurig Green Mountain, best known for its single-serve coffee pods.

We have a $122 price estimate for Dr Pepper Snapple, which is higher than the current market price. The charts have been made using our new, interactive platform. You can click here to modify the different driver assumptions, and gauge their impact on the earnings and price per share metrics.

Bai Brands’ Topsy Turvy Year

The fact that the purchase of Bai Brands is the first major deal by Dr Pepper Snapple as a standalone company is showing, as the company has modified their guidance for the impact of the purchase on the earnings four times 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 the company relied on volume expansion by selling cases to companies such as Costco and Wal-Mart’s Sam’s Club. However, DPS 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 overoptimistic results prediction.

However, Bai Brands has a tremendous potential to grow, and drive DPS’ revenues going forward. 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 drink 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.

Deal With Keurig

JAB Holdings, Keurig’s owner, has acquired a number of coffee brands, such as Jacobs, Peets, Caribou, and, Keurig. It has also scooped up Krispy Kreme Doughnuts, Panera Bread, Au Bon Pain, among other food and beverage companies. However, being able to deliver these products to places where the consumers shop requires a massive distribution network, and this is where Dr Pepper Snapple will come in. Furthermore, this deal, the biggest in the soft drinks space according to Dealogic, would also result in a hot and cold drinks combination, with immense scale for both. DPS, meanwhile, will benefit from Keurig’s e-commerce capabilities. JAB also has experience in the past of acquiring small brands, and ensuring their fast growth rates continue, an aspect DPS has clearly been struggling with for Bai. More details regarding the deal can be expected in DPS’ fourth quarter conference call.

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 in 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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