In the Spotlight - Dr Pepper Snapple
One-off charges may have seen Dr Pepper Snapple swing to a loss for its full-year in 2008, but Michelle Russell discovers that analysts and investors remain positive about the soft drinks maker's prospects as a standalone firm.
Dr Pepper Snapple Group (DPS), the beverage maker spun off by Cadbury last year, surged 15% on the New York Stock Exchange this week, beating analysts estimates and raising hopes of improvement on the soft drinks market.
Despite the Texas-based company swinging to a net loss of US$312m for 2008, its results announcement yesterday (26 March) beat Wall Street's expectations on higher-than-anticipated beverage concentrate sales, with shares rising by $1.71, to $17.22, in afternoon trading. Analysts projected a $1.61 rise on average.
So, does this mean that DPS' first foray into independence has been a success?
The Wall Street Journal reported that investors have been encouraged by the numbers, while some analysts have commented that the soft drinks company has demonstrated a good degree of resilience by outperforming estimates.
JPMorgan analyst John Faucher believes DPS' results point to improvements in beverage industry trends. "As we have been saying for the past few months, we believe the North American beverage industry is off to a better start this year," Faucher said. "The improved trends should help DPS' carbonated soft drink line."
The US beverage industry has, however, been hit by a slump in spending as more consumers turn to tap water, shunning soft drinks and bottled beverages.
The global downturn has led to lower demand for more premium products, such as Snapple, and "slightly" lower shipments of carbonated soft drinks, DPS CEO Larry Young said this week.
"With the US economy facing its worst recession in postwar times and rising unemployment rates, consumers have dramatically changed the way they shop," he said.
DPS net sales for the fourth quarter clocked in at $1.38bn, down slightly from $1.39bn a year ago, due to the stronger dollar, which hurt the value of international sales. Excluding the impact of losing US distribution of Monster Energy drinks to rival Coca-Cola in November, net sales rose 3% and sales volume rose 1%.
Yet, Dr Pepper's results have raised hopes that some of the pressures on the industry may be easing.
Stifel Nicolaus analyst Mark Swartzberg believes that Snapple, a major investor concern, will deliver "sequentially improving volume trends".
"We think Snapple mainstream is an unusual brand, that its growth into a major brand is a top priority of Snapple management (in the words of CEO Larry Young, the aim is "to stack deep, sell cheap"), and that its proposition is compelling to consumers: strong, well-known brand available for the first time in multi-packs retailing at a structural discount to Snapple in a bottle."
DPS value-priced brands seem to be off to a good start this year, according to Faucher.
The maker of 7UP and Mott's juice drinks is trying to expand the portfolio of beverages it owns or distributes, expand marketing and cut costs to help weather the economic storm.
UBS analyst Kaumil Gajrawala said the company still has opportunities to gain more share from larger rivals Coca-Cola and PepsiCo, given its plans to increase marketing, expand distribution, add more vending machines and coolers and tout the value of its Hawaiian Punch.
Swartzberg said he expects the negatives to become "less bad" in 2009 and is "seeing and hearing early shoots" of this from management, trade sources and scanner data.
"As for improving fundamentals, we expect the company's carbonated soft drink trends, which have been consistently superior to the larger carbonated soft drinks sector (flavours are on a better secular path than colas), to continue outperforming the sector," Swartzberg added. "Increasing distribution of Crush, for example, is yielding benefits. We expect this to continue as peak season unfolds."
Looking ahead, the company has forecast 2009 earnings of $1.59 to $1.67. Sales for 2009 are expected to decline by up to 4%, but, excluding the loss of the Monster Energy contract, sales are expected to rise by as much as 4%, the group said.
"In our first year as a public company, and in what is arguably one of the toughest economic environments on record, we are proud of what we have accomplished so far," Young said.
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