Analysts tip DPS for growth

Analysts tip DPS for growth

Dr Pepper Snapple Group has ridden out a fall in sales and profits in the first quarter of 2010 as analysts and investors take a longer term view of the soft drinks firm's prospects.

By the end of play yesterday (6 May), Dr Pepper Snapple's (DPS) share price had crept up 1% on the New York Stock Exchange.

Investors were clearly buoyed by the company's decision to overshadow a tough start to 2010 by raising earnings per share guidance for the full-year. 

"It's a good day for the Dr," wrote Tom Reese and Paul Rubillo on Forbes.com.

Several analsyts have been tipping DPS since the end of last year, not least because the group is expected to follow-up a $900m gain from PepsiCo's bottlers deal with a further windfall of up to $1bn from The Coca-Cola Co's agreement to take control of Coca-Cola Enterprises in North America.

DPS' share price is up by almost 27% compared to three months ago.

Group president and CEO Larry Young yesterday talked of encouraging signs on the US soft drinks sector as a whole.

"I'm cautiously optimistic," he told analysts. "We're not where we want it at yet, but (we're) going in the right direction."
 
Mark Swartzberg, of analyst group Stifel Nicolaus, talked up DPS prospects. "Business momentum and valuation metrics such as 12.5x 2011 (estimate) EPS for a stable, growing, cash generative business is attractive in any market," he said.

"We believe underlying demand for DPS products remains much stronger than that for soft drinks generally."

Stifel and other analyst groups also highlighted DPS' marketing spend, which rose in 2009 and again in the first quarter of 2010.

In March, UBS upgraded DPS to buy from neutral, saying that it does not believe the market is fully valuing strong fundamentals for the business.

Yesterday's results, then, have maintained DPS' positive momentum, despite the dip in sales by both value and volume.

That is not to say there are no threats to the DPS bubble. Young warned yesterday that legislation against soft drinks is a "significant concern at national and state level".

Stifel Nicolaus agreed, highlighting legislation as a fundamental risk to DPS' performance. "Implementation of a major soft drink tax in multiple markets would likely have a materially negative impact to DPS’s absolute volumes and earnings," it said. "However, we continue to hear such taxes lack necessary political traction for high-impact implementation."

There is also a question mark over DPS' ability to appeal to health-conscious consumers. Philip Gorham, writing on Morningstar.com, warned that "a lack of noncarbonated drinks in the firm's portfolio is likely to present challenges in the long-term".

Industry speculation has linked DPS with a move for Hansen Natural, the producer of the popular Monster Energy drink. However, Young told analysts yesterday that the firm would look to grow organically for the time being.

Challenges aside, DPS still looks like a grower in 2010.