Dr Pepper Snapple Shifts Gears With Bai Brands Acquisition

Our Industry Focus: Consumer Goods team continue their game of "fact or fluff" as they analyze a quote from Dr Pepper Snapple Group's (DPS) latest analyst call. Investors should understand both the company's overall business and the impact of its recently closed acquisition of Bai Brands. To learn more about this often-overlooked competitor to beverage giants Coca-Cola and PepsiCo, check out the video below.

Vincent Shen: For our next company, this is a beverage company, Dr Pepper Snapple. I think it gets neglected on the show a little bit. We usually talk about the big guys with Coca-Cola and Pepsi. But, Dr Pepper Snapple is in a similar situation as its bigger rivals in that it is, overall, dealing with this ongoing decline in carbonated soda consumption. Despite that, the company has done quite well for its investors. Let's get right into it. In terms of the fact of fluff quote and the dynamic there, what did you want to look at, Asit?

Asit Sharma: Dr Pepper Snapple, last year, grew 2.5%. The year before, they grew 2.5%. Yet, the stock has returned 95% over the trailing last three years. That's versus about 50% for Pepsi and just 20% for Coca-Cola. So, you're right, we talk about the big guys, and we sometimes neglect this interesting company. Investors have been willing to pony up for Dr Pepper Snapple because it has a diversified portfolio. It has brands like Peñafiel -- I apologize to our listeners who speak Spanish -- that's the number one carbonated brand in Mexico. It has Snapple, it has Mott's Juices, to supplement Dr Pepper and some of these other sparkling brands of sodas that we're more familiar with. The question is, how do you get over this 2.5% growth hump? Recently, Dr Pepper Snapple spent $1.7 billion to purchase Bai Brands, which is an enhanced water product that features fresh fruit flavors. It's one of these holistic, sustainable brands that the millennials gravitate toward. This was sort of Dr Pepper Snapple's answer to Coca-Cola and Pepsi's recent acquisitions to broaden out their portfolios.

Here's the quote. This is from, again, another CFO. This is CFO Marty Ellen, who said on the company's most recent quarterly conference call, "Coming off our solid 2016 performance, we enter 2017 with a lot of momentum, and we expect another solid year of business performance. We're expecting net sales growth before currency translation of about 5.5%, with 3% of this growth coming from our acquisition of Bai." Now, remember, I said the company has grown revenues by 2.5% the last two years. So, essentially, the whole rest of the business is going to remain flat this year, and they have the Bai acquisition effect that will give them the rest of the growth. My question is, next year, does that just become something that's lapped, and the company is again looking for growth? You have to know that Dr Pepper Snapple was originally the distributor for Bai Brands. So, they're only acquiring the revenue they didn't already have. I'm going to lean on the side of fact, because I think this is a big acquisition for Dr Pepper versus its $9 billion balance sheet, and I think it's an aggressive move into a category where it hasn't had a lot of presence. I'm a little skeptical on how it's going to grow this new company organically after the first year. But I say, all in all, this is a fact. You can bank on this quote. It's not a bad acquisition. What about you, Vince?

Shen: I generally feel similar. I think, in this industry, especially when you have the traditional carbonated soda product, as that demand declines, a lot of these newer categories claim growth, and the one that's really popular right now is some of these holistic waters, the flavored waters that have swept a lot of interest and popularity in the last few years. Ultimately, a lot of the bigger players will turn to these younger brands, these upstart companies and acquire them, and leverage, ultimately, their reach or their resources and marketing to grow them very quickly.

I think Dr Pepper Snapple has that interesting position in that it makes its distribution capabilities available to these allied partners. Bai was one of these allied partners. I think the company gets a pulse on the industry in this way. On the flip side, and you had a great article on this, Asit, the company isn't always able to take advantage of some of these allied partnerships that they have because sometimes the really popular and ultimately successful brands get acquired by their bigger rivals like Coca-Cola and Pepsi. Some of the names that come to mind that have gone on to become massive successes include Rockstar, Monster, and Vitamin Water. Overall, though, Bai is an example, it's kind of a first step that this company can take, in terms of the type of opportunities it has with some of these partners and how it seizes them, ultimately.

But a lot of the opportunity also lies in the fact that a solid 80% or 90% of the company's business remains very U.S.-focused. I think a lot of investors are curious to see how the company might expand its reach abroad as well. Mexico, for example, was a significant growth driver in the past year. That's just one example in terms of markets that lie ahead that the company could push, in terms of that global reach, that direction. But, yeah, leaning more on the fact side. But, I think something to definitely keep in mind is the fact that the company was already, as you mentioned, handling the distribution for Bai. The uptake there is a limited upside.