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In the Spotlight - Dr Pepper Snapple's Early Fizz

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Dr Pepper Snapple Group's first quarter results were greeted by a 3.7% lift in the drinks maker's shares, after it beat analysts' estimates. Michelle Russell takes a closer look at the market reaction.

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Dr Pepper Snapple's (DPSG) shares surged to a 52-week high yesterday (27 April) after the maker of Sunkist and 7UP revealed a 28% climb in quarterly profits, to US$114m, or $0.5 per share. Sales for the three months to the end of March amounted to $1.33bn, a 7% increase on the prior-year period.

Analysts' expected average earnings of $0.46 per share on sales of $1.31bn, according to Thomson Reuters.

Morningstar analyst Phil Gorham said that DPSG performed in line with its expectations in the quarter, "reflecting our view that US consumers are now slightly less focused on price than they were a few months ago".

DPSG's president and CEO, Larry Young, told analysts yesterday that the company is off to "a fast start in 2011".

"We entered 2011 stronger than ever, we executed our RCI [Rapid Continuous Improvement] strategy and it has continued to pay dividends," he said on the firm's earnings call. "As you look at the remainder of the year, we are looking at strong numbers in Q1 and Q2, we have good plans in place. We kicked off 2011 with a very strong pipeline of progress."

The strong results, DPSG said, were driven primarily by gains in its beverage concentrates business.

Gorham, however, believes there are "clouds on the horizon" that could slow growth in the second half of the year. "The firm's underpenetration in noncarbonated drinks will present long-term challenges," Gorham said.

Drinks companies have recently begun to see an improvement in demand, alongside an improvement in the economy. However, growth in North America remains sluggish compared with international markets, and Dr Pepper Snapple derives most of its sales in the US.

The soft drinks maker also has to contend with commodity cost pressures.

"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 Dr Pepper can offset these cost pressures by cutting back on price promotions."

Nonetheless, while DPSG has forecast packaging and ingredient costs to increase by between 7% and 9% in 2011, the company has stuck with its full-year earnings guidance.

The firm expects 2011 earnings of $2.70 to $2.78 per share and a sales rise of 3% to 5%. Young said: "Despite a significant escalation in commodity and fuel costs ... I am confident we'll deliver our commitments for the year."

Bernstein Research analyst Steve Powers echoed some of that confidence, particularly on the firm's domestic growth opportunities. 

“Clearly, in our view, solid growth in Snapple, Hawaiian Punch, Canada Dry, and (especially promising) Sun Drop were positives for us in the quarter,” Powers said. “While we expect volatility within Dr Pepper's portfolio (especially with Sun Drop consuming so much incremental attention in Q1), we will be looking for improvement in these other brands as 2011 progresses.”

With rising costs and cash-strapped consumers, DPSG has decent prospects but still needs to work hard to stop its early fizz from fizzling out.


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