Dr Pepper Snapple Groups shares were fizzing yesterday

Dr Pepper Snapple Group's shares were fizzing yesterday

Dr Pepper Snapple Group's shares were fizzing yesterday (17 February) as the beverage giant recorded full-year profits that beat estimates, cheering investors.

The beverage maker reported slightly lower fourth-quarter net income on Thursday (18 February), but its adjusted results beat Wall Street expectations and its shares rose almost 6%. Dr Pepper Snapple Group (DPSG) said that net profits fell nearly 2% to US$112m, or $0.49 per share last year. But, adjusted to exclude a loss on the early retirement of debt and tax items, net profits totaled $0.67 per share, beating the $0.63 per share analysts were expecting.

Sales rose by 4% to $1.41bn. Analysts had expected $1.40bn.

As a result, shares climbed 4.1% to $35.67 in midday trading, closing at $36.20.

"DPSG performed in line with our expectations in the fourth quarter, reflecting a difficult pricing environment," said Morningstar analyst, Philip Gorham. "The results give us confidence in both our 2011 forecasts and our thesis that the firm's under-penetration in non-carbonated drinks will present long-term challenges. Our fair value estimate and our long-term outlook are unchanged."

Teressa Rivas, writing for the Wall Street Journal, said it is not surprising that DPSG is showing strength.

"Its eponymous soft drink (Dr Pepper) is very popular in the south and mid-west (of the US), but has yet to fully penetrate the east and west coasts," Rivas said. "This allowed the brand to see 4% growth in 2010 while the carbonated beverage group saw sales contract 2.5% nationwide."

Sanford Bernstein analyst Ali Dibadj added: "We see this very much as a story of deregionalisation, with DPSG moving outside its core part of the US to other regions." He noted that the company's cash flow is "attractive", and a number of cost-cutting opportunities still exist that could drive shares higher.

Gorham believes the concentrate segment was the standout for the firm in 2010, with an 8% increase in sales being driven by higher pricing, without a material impact to volumes.

However, he added: "We think it is highly unlikely that consumers would swallow 8% price increases in the current environment, and we think the timing of some pricing discounts will result in weaker top line growth in the first quarter of 2011."

Rivas believes that the passing through of higher pricing to consumers by the firm is "crucial given high commodity costs".

Indeed, Dr Pepper will not be the only firm to experience commodity pressure this year. Only last week, PepsiCo told analysts that it expects commodity prices to remain a "major headwind" for the firm this year. The chairman and CEO of Danone, Franck Riboud, also said that he expects pressure from rising commodity costs this year. Dibadj has also highlighted concerns over cost inflation for The Coca-Cola Co.

For DPSG, commodity cost pressure is likely to come primarily from rising oil prices, which will impact not only distribution costs, but also PET costs for packaging.

"We estimate packaging represents around 50% of a soft drink bottler's cost of goods sold," Gorham said. "In an environment of declining soda sales, stagnant real wage growth and rising gas prices, we think it will be several more months before DPSG can offset these cost pressures by cutting back on price promotions."

Nonetheless, despite the near-term troubles caused by commodity inflation and weak consumer spending, UBS analyst Kaumil Gajrawala thinks DPSG will continue to increase sales.

"Longer-term, DPSG should continue to grow volumes through a combination of expanding distribution, increasing coolers and Hispanic migration," Gajrawala said.