Is Dr Pepper Snapple Destined for Success?

With growing health concerns over soda, more and more consumers are shifting toward non-carbonated beverages. The slump in demand for soda and changes in consumer preferences are forcing key industry players like Dr Pepper Snapple Group (NYSE: DPS  ) to pour more money into still beverages. Amid this changing trend, whether or not the company can outpace its industry peers like Monster Beverage (NASDAQ: MNST  ) and The WhiteWave Foods Company (NYSE: WWAV  ) remains to be seen.

First-quarter earnings
Dr Pepper Snapple's first-quarter earnings came in at $0.74 per share, which beat the analyst estimate of $0.59 per share. Earnings also climbed 40% year-over-year and the company attributed this to solid margins, strong revenue, and lower taxes. 

Net sales grew 1% to $1.40 billion as a result of improving sales volume and price increases. Adjusted operating margin inched up 290 basis points to 17.7%. The effective tax rate during the quarter was 34.4%, a decrease from 36.4% in the comparable quarter.

What is Dr Pepper Snapple up to?
According to Beverage Digest, volume for carbonated soft drinks, or CSD, dropped 3% in 2013; this marks the ninth consecutive year in which it has declined. As consumers have become more wary of artificial sweeteners and health concerns have pushed them away from drinks with high sugar content, they are looking for alternatives such as juices and energy drinks. In addition, regulatory pressures and new taxes on sugar-sweetened beverages are also hurting CSD sales.

Due to this growing health awareness, Dr Pepper Snapple has increased its emphasis on still beverages. For instance, it recently launched a Mott's juice drink with 40% less sugar and no artificial sweeteners. Moreover, the company has also introduced several new flavors to its Mott's Adults line. In order to attract customers during the summer season, it has offered a limited time offer of Dr Pepper Vanilla Float.

During the quarter, Dr Pepper Snapple entered the fourth year of its Rapid Continuous Improvement program, or RCI. Under the program, the company eliminated excess inventory from its warehouses. As a result, it reduced its warehouse footprint by 0.5 million square feet or about 3%. Further, it also cut driver check-in and check-out times by 50%. Management is hopeful that complete implementation of RCI throughout the company will enhance productivity even more.

In 2014, Dr Pepper Snapple expects its transportation costs to increase by $17 million. It projects that people-related costs will jump by $30 million as a result of higher labor and health costs. Higher taxes in Mexico will increase its cost of goods sold by approximately 1.6%. Furthermore, foreign exchange translation will hurt its operating profit by 50 basis points.

During this year, the company will buy around $375 million to $400 million of its common stock. It expects volume to drop slightly due to a decline in sales of non-carbonated drinks. However, the company believes that its net sales will be flat to up 1%. Its earnings guidance remains unchanged at $3.38-$3.46 per share.

Industry peers
During its latest quarter, Monster Beverage reported per-share earnings of $0.55, which beat the Zacks Consensus Estimate of $0.49. Earnings were also up 49% from last year's comparable quarter, as the company benefited from lower tax rates and selling and marketing expenses. Although the company posted 10.7% growth in revenue, it missed analysts' expectations by 1.6%; it attributed this to new products which cannibalized the sales of existing ones. Another reason for weak revenue was the company's energy drink segment, which didn't perform well abroad.

The maker of organic foods and beverages, WhiteWave, recently posted its first-quarter results. Its earnings stood at $0.22 per share, up 40% from the same period last year. Both earnings per share and revenue topped the Zacks Consensus Estimates by 10% and 5%, respectively. Revenue skyrocketed 36% to $830 million as the company's North American and European businesses experienced strong volume growth. Going forward, WhiteWave plans to ramp up its production capacity and this should help it generate even more sales.

Final thoughts
Dr Pepper Snapple had an admirable first quarter as its earnings and revenue beat expectations. Just like other beverage companies, Dr Pepper Snapple has been exposed to the bumps in the US soda market. For this reason, it is rightly making more investments in still beverages rather than carbonated drinks.

The RCI program has improved the company's productivity to a great deal and will continue to do so in the coming years. This will also enhance value for its customers, suppliers, employees, and finally its shareholders. Dr Pepper Snapple has maintained its prior earnings guidance, which is an encouraging sign for its investors.

However, unlike its big competitors PepsiCo and Coca-Cola, it doesn't have a strong presence in the emerging markets (especially Asia) where people still aren't quitting soda. Therefore, carbonated soft drinks will keep hurting Dr Pepper Snapple in the long run. Considering this, I will remain neutral on the company at this point in time.

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