We reiterate our long-term ‘Neutral’ recommendation on Dr Pepper Snapple Group, Inc. (DPS) with a target price of $40.00 per share. Dr Pepper Snapple is a leading manufacturer and distributor of non-alcoholic beverages in the U.S., Canada and Mexico.
The company commands a strong portfolio of well-established flagship brands, such as Dr Pepper, Snapple, 7UP, Mott’s, Sunkist, A&W, Canada Dry, Schweppes, Hawaiian Punch, Squirt and Peñafiel, which offers a strong competitive advantage to the company and strengthens its well-established position in the market.
Moreover, Dr Pepper’s 22 manufacturing facilities and over 200 distribution centers are strategically located across North America. The company’s warehouses are located at or near the bottling plants and have 5,000 trucks for transportation purposes. These facilities enable the company to better align its operations with its customers, reduce transportation cost and have better control over the timing and management of new product launches.
Additionally, Dr Pepper has recently completed construction of its production and distribution center in Victorville, California. The $120.0 million production and distribution facility will serve the western hub and bolster distribution in California and parts of the desert in the South West, where nearly 20% of the U.S. population resides, resulting in an improvement in the company’s top and bottom lines.
Also, Dr Pepper is in the midst of its Rapid Continuous Improvement (RCI) program. As a result, the company has been able to reduce its package changeover time at its Aspers plant by 72% from 87 minutes to 24 minutes. The program will give more flexibility to its plants to meet consumer demand and also enable it to reduce inventory and storage costs.
On the flip side, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels and high household debt levels, which may negatively impact their discretionary spending and, in turn, the company’s growth and profitability.
Furthermore, the liquid refreshment beverage industry is highly competitive and continues to evolve in response to changing consumer preferences. Competition is generally based on brand recognition, taste, quality, price, availability, selection and convenience. The two largest competitors in the liquid refreshment beverage market are The Coca-Cola Company (KO) and PepsiCo Inc. (PEP), each representing more than 30% of the U.S. liquid refreshment beverage market by volume.
Also, Dr Peppers’ financial performance may be substantially affected by its significant presence in the international market (Canada, Mexico and the Caribbean), which exposes it to unfavorable foreign currency translations, economic or political instability and other governmental actions on trade and repatriation of foreign profits.
DR PEPPER SNAPL (DPS): Free Stock Analysis Report
COCA COLA CO (KO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
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