Dr Pepper Snapple Strong On RCI Program, CSD Volumes Weak

On Aug 28, we issued an updated research report on Dr Pepper Snapple Group Inc. (NYSE:DPS) , manufacturer and distributor of carbonated soft drinks (CSDs) and non-carbonated beverages (NCBs).

Aggressive media campaigns, pricing gains, innovation and productivity improvements are driving the upside for Dr Pepper. However, weak volumes of its carbonated beverages and foreign currency translation raise caution.

RCI Program to Boost Growth

We are encouraged by Dr Pepper’s Rapid Continuous Improvement (RCI) program which has led to strong earnings growth since inception in 2010. Through the program, the company has been able to reduce inventory and storage costs and drive cash flow, which can be returned to shareholders via dividends and share repurchases and re-invested to boost the top line.

The company’s expansion of the program through the implementation of five new tracks in 2015 is boosting productivity. In 2016, it introduced a set of Lean tracks in a bid to drive top-line growth and productivity. Notably, earnings rose 9% and sales increased 2.5% in 2016. In the first half of 2017, sales increased 4% and earnings grew 3%. Dr Pepper will continue to focus on RCI and Lean management in 2017.

Also, aggressive marketing programs are the other positives. Marketing plans include increasing distribution and availability of the key brands with added focus on high-margin channels and re-deploying cold drink equipment assets across its DSD (Direct Store Delivery) footprint. Moreover, the company regularly develops innovative products to meet evolving consumer needs.

Concerns

Dr Pepper’s shares have declined 0.7% so far this year, compared to the industry’s 14.2% growth. Estimate revisions went down 4.8% for the current quarter and 0.2% for the year in the last 30 days.

Dr Pepper has been seeing persistently sluggish volumes of its carbonated beverages, including the diet versions, due to CSD category headwinds. Cross-category competition and growing health and wellness consciousness are hurting CSD category growth. The diet drinks are also under pressure due to increasing consumer concern regarding the use of artificial sweeteners.

Again, the company has international operations which expose it to the effects of fluctuations in foreign exchange rates of the Canadian dollar and Mexican peso. Foreign exchange had a 1% impact on revenues in 2016. It is expected to dent core EPS by 4 cents in 2017.

Zacks Rank & Stocks to Consider

Dr Pepper currently has a Zacks Rank #3 (Hold).

A few better-ranked stocks in this Consumer Staples sector are Post Holdings, Inc. (NYSE:POST) , McCormick & Company, Incorporated (NYSE:MKC) and Ingredion Incorporated (NYSE:INGR) . While Post Holdings sports a Zacks Rank #1 (Strong Buy), Chefs' Warehouse and Ingredion carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Post Holdings’ current quarter’s expected earnings growth is 41.8%.

Current quarter’s expected earnings growth for McCormick is 1.7%.

Ingredion projects current quarter earnings growth at 3.6%.

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