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This Beverage Maker Should Be One of the Most Rewarding Picks for Your Portfolio

April 25, 2014 | About:
Suravi Thacker

Suravi Thacker

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Although declining soda demand by health conscious customers has been a matter of concern for all the beverage makers, they have easily been able to overcome it. With the introduction of various varieties of juices and other health drinks, beverage makers are being able to shine brightly.

One of the apt examples is Dr Pepper Snapple (DPS), which has performed remarkably well in its recently reported first quarter. The quarterly numbers were way ahead of the Street’s expectations, pushing its share price north.

Into the numbers

Driven by 1% higher volumes and increase in product price, revenue jumped 1% over last year, clocking $1.4 billion. Revenue growth of 8% in beverage concentrates enabled the retailer to register higher top line. Also, sales from Latin America surged 17% during the quarter, as higher demand despite increase in prices pushed sales north. Weakness in the U.S. and the Canadian market was offset by strength in Mexico and Caribbean markets.

Because of growing health consciousness of people, there is a shift towards non-carbonated drinks. However, Dr Pepper Snapple witnessed decline in volumes of non-carbonated drinks in its first quarter. On the other hand, rival PepsiCo (PEP) registered a growth of 2% in non-carbonated beverage revenue in its recent quarter.

Nonetheless, Dr Pepper seems to have made its way out of the situation. Dr Pepper Ten, a mid-calorie drink, has become quite popular among customers. In fact, for the last quarter, the volume of the drink inched up by 1%, helping overall revenue grow further.

Earnings for the quarter grew a whopping 40% to $0.74 per share, much higher than the analysts’ estimate of $0.59 per share. The increase in bottom line was mainly due to better productivity and lower input costs. In fact, it also led to a gross margin expansion to 60.4% from 57.2% last year, as product costs dropped by 6% during the period.

Road ahead

Dr Pepper Snapple announced its plans to reduce marketing spending by $30 million during this year. In fact, marketing expense was reduced by $7 million in the first quarter itself. This move should further boost Pepper’s bottom line.

On the contrary, other players such as PepsiCo and Coca Cola are aiming to increase their marketing spend so that they can attract more customers. It will be interesting to see how things shape up with these beverage players as some try to maximize revenue and others to maximize profits.

Additionally, Dr Pepper has been announced as the official football championship partner by ESPN, which will enable the beverage company to market its products and attract customers. It has also introduced a new juice drink, which has less sugar and caters to people looking for healthy options. These initiatives are expected to benefit the company.

Dr Pepper Snapple’s future looks bright as the retailer reaffirmed its outlook for FY 2014. It expects sales to grow by 1% and earnings to be in the range of $3.38 and $3.46 per share, as marketing, packaging and ingredient costs are expected to decline.

Final thoughts

Dr Pepper’s great quarterly numbers and its initiatives to keep costs under check is look quite interesting. Its efforts to reduce marketing and packaging costs should be helpful. However, lower marketing might lead to decreased sales. Hence, the beverage retailer should also take care of its top line. Nonetheless, a bright outlook and great numbers make this company worth a bet.


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