Dr Pepper Snapple Group Inc. (DPS): This Soda Maker Is Going Down

On July 24, the American soft-drink company Dr Pepper Snapple Group Inc. (NYSE:DPS) released its earnings for the second quarter. The company met its earnings estimates, largely due to favorable pricing.

With the soda industry declining in North America, the million dollar question is: is Dr Pepper Snapple Group Inc. (NYSE:DPS) a good long-term buy?

Quarterly earnings

Dr Pepper Snapple’s earnings met its estimates (compiled by FactSet), but fell short on a year-over-year basis. In the second quarter, the company reported a net profit of $155 million, or $0.76 per share, versus $178 million, or $0.83 per share, last year.

The company’s revenue slipped 1% to $1.61 billion, while its sales volume plunged by 4%. Decline in volume was partially offset by high pricing. Operating income also decreased 5% to $285 million.

The primary reason behind low revenue was a decline in Dr Pepper Snapple Group Inc. (NYSE:DPS)’s soda sales, which dropped 3%. Sales volume for its four major brands declined 1% during the quarter. Regionally, North America’s volume dipped 4%, whereas, it jumped 2% in Mexico and Caribbean.

Profit guidance

In the next quarter, analysts expect Dr Pepper Snapple to earn $0.84 per share on revenue of $1.58 billion. For the full year, analysts’ estimates stand at $3.08 per share on $6.10 billion revenue. Dr Pepper Snapple expects itself to make a profit of $3.04 to $3.12 per share during this year.

Recent developments: Institutional investors selling Dr Pepper Snapple

In the last six months, Dr Pepper Snapple Group Inc. (NYSE:DPS)’s institutional investors sold more than 15 million shares, reflecting their lack of confidence in the company. Moreover, company’s insiders also sold almost 335,000 shares during the same period.

Going forward

Given the fact that Dr Pepper Snapple’s core business consists of carbonated-drinks, its future doesn’t look that bright. Unlike PepsiCo, Inc. (NYSE:PEP) and The Coca-Cola Company (NYSE:KO), it doesn’t have the luxury of capitalizing on its still-beverages and food items. Though the company has a vast range of non-carbonated drinks, it doesn’t have strong brands like its big rivals.

With soda sales going down in North America, Dr Pepper Snapple Group Inc. (NYSE:DPS)’s sales volume will go down further. As Dr Pepper Snapple operates largely in the U.S. and Canada, it can’t benefit from a growing soda market in Asia and Africa. However in the case of Mexico and the Caribbean, the company should keep on multiplying its volumes.

Valuation

Dr Pepper Snapple is trading at a forward P/E (1yr) of 14.18 and yields a dividend of 3.2%. Using an industry forward P/E (1yr) of 16.7, I can value Dr Pepper Snapple Group Inc. (NYSE:DPS). But, since it’s expected to underperform its rivals, I would value it using a discount of 10%. Hence, a forward P/E (1yr) of 15.03 would be used for its valuation.

Using earnings multiples, I value Dr Pepper Snapple at $46. This shows that it’s fairly priced at this stage.