Zacks_Analysts' Blog : Earnings Preview: Dr Pepper Snapple - Analyst Blog

Dr Pepper Snapple Group Inc. (DPS) is scheduled to report its third-quarter 2011 financial results before the opening bell on October 26, 2011. The current Zacks Consensus Estimate for the quarter is 71 cents a share. This represents a year-over-year estimated growth of 18.3%.

Second-Quarter 2011 Summary

Dr Pepper Snapple reported second-quarter 2011 earnings of 77 cents per share compared with 74 cents per share in the year-ago period. However, quarterly earnings were in line with the Zacks Consensus Estimate.

During the quarter, Dr Pepper's net sales grew approximately 4% year over year to $1,582.0 million. However, it fell short of the Zacks Consensus Estimate of $1,590.0 million. The year- over-year growth was mainly attributable to price increases, favorable foreign currency translations and revenues from The Coca-Cola Company (KO) licenses and favorable impact of repatriated brands.

Management Guidance

Dr Pepper reiterated its full-year 2011 adjusted earnings in the range of $2.70 to $2.78 per share on a 3% to 5% growth in net sales.

Agreement of Estimate

For the third quarter of fiscal 2011, out of 12 analysts covering the stock, 2 analysts revised their estimates upward, while none have revised in the opposite direction in the last 30 days. For full fiscal 2011, out of 12 analysts, positive and negative revisions were made by 1 analyst each in the last 30 days.

In the last 7 days, out of 12 analysts, 1 moved in the upward direction with no downward movement in estimate for the third quarter of fiscal 2011. For fiscal 2011, no movement in estimates has been noticed in either direction over the last 7 days.

Magnitude of Estimate Revisions

With little affect from earnings revisions by analysts in the last 30 and 7 days, the Zacks Consensus Estimates for third-quarter 2011 has increased by a penny to 71 cents per share while for fiscal 2011 it has remained stagnant at $2.74 per share.

Surprise History

With respect to earnings surprises, Dr Pepper showed a favorable trend in the last four quarters. The company has recorded positive surprises in the trailing four quarters with a low of 0.0% and a high of 8.7%. On average, the earnings surprise was a positive 6.7%. Based on the current flow, we expect the company to come up with healthy results in the upcoming quarter.

Our View

Dr Pepper is a leading manufacturer and distributor of non-alcoholic beverages in the U.S., Canada and Mexico. Moreover, the company commands a strong portfolio of well-established flagship brands, such as Dr Pepper, Snapple, 7UP, Mott's, Sunkist, A&W, Canada Dry, Schweppes, Hawaiian Punch, Squirt and Penafiel. These brands offer a strong competitive advantage to the company and strengthen its well-established position in the market.

Moreover, Dr Pepper's 22 manufacturing facilities and over 200 distribution centers are strategically located across North America. The company's warehouses are located at or near the bottling plants and have 5,000 trucks for transportation purposes. These facilities enable the company to better align its operations with its customers, reduce transportation cost and have better control over the timing and management of new product launches.

Furthermore, Dr Pepper is in the midst of its Rapid Continuous Improvement (RCI) program. Therefore, the company has been able to reduce its package changeover time at its Aspers plant by 72% from 87 minutes to 24 minutes. Dr Pepper anticipates that the program will lead to a cash productivity of at least 150.0 million through 2013. The program should give more flexibility to its plants for meeting consumer demand while enabling it to reduce inventory and storage costs.

However, Dr Pepper's financial performance may be substantially affected by its significant presence in the international market (Canada, Mexico and the Caribbean), which exposes it to unfavorable foreign currency translations, economic or political instability and other governmental actions on trade and repatriation of foreign profits.

Besides, the liquid refreshment beverage industry is highly competitive and continues to evolve in response to changing consumer preferences. Competition is generally based on brand recognition, taste, quality, price, availability, selection and convenience.

The two big competitors in the liquid refreshment beverage market are The Coca-Cola Company and Pepsico Inc. (PEP), each representing more than 30% of the U.S. liquid refreshment beverage market by volume.

Currently, Dr Pepper maintains a Zacks #3 Rank, which translates into a short-term Hold rating. Moreover, our long-term recommendation on the stock remains Neutral.