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Tickers in this Article: DPS, CBY, KO, PEP, HANS
Dr. Pepper Snapple (NYSE:DPS) reported first-quarter results on Wednesday that were better than analysts expected. The company also raised full-year guidance, which sent the shares up on an overall down day in the market. Near-term trends continue to look favorable, but the long-term outlook is a bit more flat. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

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First Quarter Recap
Reported net sales fell 3% to $1.26 billion, primarily on the previously announced loss of distribution rights for Hansen Natural (Nasdaq:HANS) products. Excluding this and currency volatility, Dr. Pepper detailed that sales grew 4% as volumes improved 6%. Trends in the majority of product categories were positive, with Dr. Pepper volume growing 1%, and 7UP, Sunkist, A&W and Canada Dry "up slightly". Crush volume was up significantly on added distribution capacity, which rounded out the carbonated soft drink (CSD) category. Management estimated it picked up 0.8% CSD market share in the U.S. as it outperformed rival PepsiCo (NYSE:PEP), which reported a mid-single digit decline in North America during its first quarter.

Drinks of the non-carbonated variety were led by a 31% volume growth from value-based Hawaiian Punch. Premium drink volumes fell 16% on continued difficulties with the Snapple brand, which fell 22%. Other juice and fountain drink volumes to foodservice clients grew in the low single digits. Rival Coca Cola (NYSE:KO) experienced steadier trends in its North American non-carbonated drinks as volumes grew during its first quarter.

Reported earnings grew 37% to 52 cents per share. Excluding the distribution deal and other one-time items from last year's quarter, Dr. Pepper detailed that earnings would have been 37 cents per share, which was ahead of what analysts were projecting.

Dr. Pepper's forward guidance was also higher than current consensus estimates. It projects full-year sales from continuing operations to grow 2-4% and earnings of $1.70-1.78 per share, or 11 cents above previous guidance. It also expects to pay down $400 million of long-term debt, which stood at $3.4 billion as of the end of the quarter and was inherited when Cadbury plc (NYSE:CBY) spun out the Dr. Pepper Snapple Group.

Reducing Debt
Dr. Pepper is whittling down its heft debt load as it is focused on using cash flow generation to reduce indebtedness. However, this will take time, and it leaves the company little ability to repurchase shares or pay dividends. In addition, interest expense reduces the bottom line – for the quarter, interest ate up 21% of operating income. Additionally, the company only has rights to its brands in North America and the Caribbean, with international rights scattered between different companies. Coke has the rights to Dr. Pepper, Canada Dry and Crush in certain overseas rights, while Pepsi holds international title to 7UP.

Bottom Line
Dr. Pepper has a number of investment drawbacks. Again, debt will be paid off over time, but the lack of exposure to faster-growing global markets is a significant negative. The company is performing better than most expected as an independent entity, but one has to question how much long-term upside potential exists given the dependence on more mature beverage markets. (Find out how to combine the best of both strategies to better understand the markets in Blending Technical And Fundamental Analysis.)

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