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Tickers in this Article: DPS, PEP, KO, CBY
Dr Pepper Snapple (NYSE:DPS) offered an upbeat 2008 earnings forecast late last week in conjunction with its first quarter numbers, but my interest in the stock is about as flat as warm, hospital-served ginger ale.

The Texas-based company, which is a recent spinoff from Cadbury Schweppes (NYSE:CBY), expects to earn $1.91 a share in 2008 (excluding any charges). That's well north of the $1.87 a share that analysts had been expecting. Not surprisingly the stock was up almost 7% on the upbeat news. The market may be buying into all of this hype, but I'm not. There were a pair of issues in the first-quarter earnings report that gave me pause. Let's dig deeper.

Sales are Up, But Volume is Down
In the period ended March 31, the company saw sales increase 3% to $1.3 billion from about $1.27 billion. Much of the increase can be attributed to single-digit price increases it instituted. As per the earnings report, "Volume in bottler case sales declined 3%. Carbonated soft drinks declined 2% and non-carbonated beverages declined 8%." That's not too impressive in my book. (For related reading, check out Earnings: Quality Means Everything.)

Big deal, an increase in sales is an increase in sales right? To be clear, it makes good business sense to jack up prices given the prospect for rising commodity costs, and I'm not saying that price increases were a bad strategy. But, there are two problems with this feel-good story.

Firstly, even with the price increases its sales line was up only 3%. Frankly, that's not too impressive given that behemoth Coca-Cola (NYSE:KO) posted a 21% increase in net operating revenue in its first quarter to $7.4 billion from $6.1 billion, and PepsiCo (NYSE:PEP) reported a 13% jump in first quarter net revenue to $8.3 billion from $7.4 billion.

Another concern I have is that if the economy remains difficult and the space remains competitive will Dr Pepper be able to jack up prices again next year, and if not, how will it grow revenue? I would have preferred more pep in the top line results as it would have made me feel that the company has some room for error.

If it Meets 2008 Estimates, So What?
Let's suppose for a moment that the company will absolutely positively hit its 2008 forecast and earn $1.91 a share (again excluding charges). That's not a foregone conclusion, but let's just assume.

That means that Dr Pepper Snapple trades at about 13-times the current year estimate. Frankly, that's no bargain in my opinion given that analysts are expecting the company to grow at about an 8% pace per annum in the next five years.

Its earnings multiple also isn't overly impressive in my book when compared to the big two. I can pick up Coke for about 18.2-times the current year estimate of $3.07 per share. Sure, that's higher than DPS, but Coke is expected to grow at about a 10% per annum in the next five years. It also pays a dividend, and the yield is currently about 2.7%. DPS's dividend? Zilch.

Pepsi trades at about 17.6-times the current year estimate of $3.73 a share. Not terribly cheap to be sure, but analysts are forecasting the company to grow at about a 10.9% pace per annum in the next five years. It also sports a dividend, and its yield is currently 2.5%. (For everything you ever wanted to know about the earnings multiple, check out our P/E Ratio Tutorial.)

Bottom Line
Dr Pepper Snapple's better-than-expected 2008 forecast is considered as a big positive by some, but I think there is more to the story. Anemic Q1 sales growth and Dr Pepper Snapple's weak valuation in comparison to its peers are real problems, and they are big enough that I'd steer clear of the stock.

To explore the controversies surrounding companies commenting on their forward-looking expectations, read Can Earnings Guidance Accurately Predict The Future?

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