Dr Pepper Snapple May Be a Long-Term Investment

One of North America's leading refreshment beverage companies, Dr Pepper Snapple (DPS, Financial) markets more than 50 brands of carbonated soft drinks, juices, teas, mixers, waters and other premium beverages. From the invention of the first soft drink more than 200 years ago to some of the industry's most beloved beverage brands, Dr Pepper Snapple Group has a proud legacy of innovation, bold and distinct flavors, and entrepreneurial spirit.

Recent performance

DPS reported third quarter 2014 EPS of $0.96 compared to $1.01 in the prior year period. Core EPS were $0.98, up 11%, compared to $0.88 in the prior year. Year-to-date, the company reported earnings of $2.79 per diluted share compared to $2.28 per share in the prior year period. Core EPS were $2.77, up 23%, compared to $2.25 in the prior year period.

Reported income from operations for the quarter was $316 million. Year-to-date, the company generated $769 million of cash from operating activities compared to $616 million in the prior year. Capital spending totaled $103 million compared to $111 million in the prior year period. The company returned $513 million to shareholders in the form of stock repurchases ($276 million) and dividends ($237 million).

DPS President and CEO Larry Young said, "Our teams posted yet another quarter of solid performance in what continues to be an extremely challenged environment. We remained focused on our strategy of building our brands with consumers and executing with excellence in the marketplace." (Source: Company’s Website)

Full year guidance

The company now expects full-year reported net sales to be up approximately 1% and expects core EPS to be in the $3.56 to $3.62 range. Packaging and ingredient costs are now expected to decrease COGS by 2.5% on a constant volume/mix basis. The company now expects its core tax rate to be approximately 35.0%. Capital spending will be approximately 3% of net sales. The company intends to repurchase $375 million to $400 million of its common stock.

Growth prospects

The company has recently acquired rights to venture into the Middle East and Far East. The company has well-laid plans to sell tea initially in this market, since this part of the globe poses good opportunities for this product. A larger percentage of its revenues (approx. 88%) come from the domestic front, which itself bears a testimony to the fact that DPS has a huge untapped and unexplored international market. It is true that Coca-Cola (KO, Financial) and Pepsi (PEP, Financial) are much larger when compared to DPS, but the company is constantly innovating for a better future. DPS is already ruling the roost when it comes to flavored carbonated beverages.

Final thoughts

People are now much more health conscious as the rate of obesity is accelerating at a great pace. Sugar, being the most important ingredient of soft drinks, is the main contributor to obesity. Health consciousness has paved the way to a decline in the consumption of carbonated soft drinks and diet soda in the U.S. market. The only reason for this is health problems such as weight gain, poor dental health, diabetes and cardiovascular disease. These are the points that may work against the company. But with plans of international expansion and focus of shifting towards non sugary items, the company will carve a niche for itself. An increasingly evolving middle class, higher disposable incomes and changing lifestyles are key factors that will fuel growth of this company in the beverage industry.

Soft drinks have been a hit among people from all age groups.DPS is constantly innovating new products and techniques for its valued customers. Over the years, this company has also provided a decent return to its valued investors. DPS posted decent third-quarter results. A lot of value is tapped in this company, and the company is expected to create greater shareholder returns. The company is already headed for international expansion, which surely will push the revenue higher. In my opinion DPS should be a buy.