Dr Pepper Snapple Group – Is It Worth Your Money?

Dr Pepper Snapple Group (DPS, Financial) continued its fiscal 2014 momentum forward and posted a stellar first quarter fiscal 2015 results last month. The company started fiscal 2015 on the front foot after exiting fiscal 2014 with better than guided range performance. During the last one year, shareholders of DPS are sitting on gains of over 53%. So, after such strong gains, is the stock still attractive?

Let’s recap the quarter and see what the company holds for investors, going forward.

First-quarter recap

Net sales for the quarter increased 4% (5% on currency neutral basis) year-over-year backed by 2% year-over-year volume gains. The company sold more proportionately more finished goods cases than concentrate cases and this favorably impacted year-over-year net sales by 1.5% year over year. Product mix further added 1% to sales jump, which was partially offset by 1.5 due to currency translation headwinds. However, despite the currency headwinds, DPS managed to beat analysts’ expectation on revenues.

On the back of healthy top-line growth, DPS reported earnings per share of $0.81 and beat estimates by $0.05.

The beverage maker declared dividend of $0.48 per share with forward yield of 2.48%

Headwinds ahead

1. Foreign currency headwinds will continue going forward. In fact, Management now expects the same to be negatively impacting sales by 1.5% instead of 1% as projected earlier for fiscal 2015. In addition, operating income and EPS will be impacted negatively by 3% versus 2% projected earlier.

2. CSD category will remain under pressure as consumers are becoming more health conscious and vigilant about the use of artificial sweeteners, high sugar content and related obesity concern. CSD volumes are expected to decline in fiscal 2015. In fact the same declining trends are visible across peers like Pepsico (PEP, Financial) and Coca-Cola Company (KO, Financial) in the CSD segment.

3. Selling, general and administrative, or SG&A, and operating expenses are also expected to climb up due to health and welfare and other insurance costs, shortages in the transportation industry and inflation in field labor costs.

Braving the headwinds

DPS started the Rapid Continuous Improvement, or RCI, program way back in 2010, and this has been one of the catalysts for driving earnings growth since then. Despite the program being in its fifth year of operation, the momentum is sustained. During earnings call conference, Marty Ellen, CFO, said:

“let me provide you with a quick update on RCI. Building on the success of our 2014 lean tracks, we've implemented five new tracks this year, led by a new set of senior and mid-level leaders as a way of further developing lean capabilities across the organization. The tracks will target waste elimination, in areas such as nonworking marketing spend.”

For example:

1. DPS improved yield on fruit juices and sauces in one of its manufacturing facilities by over $1 million.
2. The beverage maker also eliminated rework and rush hours in one area of its marketing creative process, resulting in over a $1 million reduction in agency spending.
3. In Houston, DPS closed 10% of Canada Dry two-liter voids following one Kaizen event.

So, using the RCI process, the company will be able to mitigate the headwinds noted above and hence it now expects the fiscal 2015 sales to be approximately 1% net of a foreign currency headwind. This will be backed by an increase in total sales volume, despite the headwinds in CSD category.

Additionally, with price mix being up by about 2%, it will also help drive growth, despite the headwinds. In addition, deflation of PET and apple juice concentrate costs is expected to reduce total cost of goods sold by approximately 1% on a constant volume mix basis.

For fiscal 2015, earnings are expected to be in the range of $3.80 to $3.88 range, inclusive of the 3% or $0.12 per share foreign currency headwind noted earlier.

String of positive earnings surprises

In three out of the last four quarters, the company has posted positive earnings surprise as shown below, and I don’t see any reason why the momentum should not continue. To ensure the same, the company plans to repurchase $500 million to $550 million worth of its own stock during fiscal 2015.

Wrapping up

Dr Pepper Snapple Group continued the momentum of fiscal 2014 into fiscal 2015 and started the year on a strong note. The company has managed to brave the currency translation headwinds and surprised on earnings and sales.

Given the strength of its RCI initiative, which has fueled growth ever since its inception, the same is expected to continue going forward. Additionally, the dividend yield is almost the same one would get on treasury bonds.

Hence, this stock is a buy for long-term gains.