DPS Hoping For a Better 2H

DPS cited unseasonably cold and wet weather, a cautious consumer, and continued carbonated soft drink (CSD) category headwinds as the major factors influencing uninspiring Q2 results. DPS’s hope going into the back half of the year is improved weather, lesser commodity costs (especially with better visibility on lower apple costs in 2H), and the tailwind of lapping easier volume comps in Q3.

 

Our quantitative set-up for DPS shows -4.1% of downside from its current price to its intermediate term TREND line of support, with topside immediate term TRADE resistance at $47.66. We believe that the stock may benefit from weather and easier comps in 2H, but are not compelled by the lack of quality in its results. We’d opportunistically trade around DPS.

 

DPS Hoping For a Better 2H - vv. dp

 

Our concern is not a new one and remains grounded in the fact that DPS’s portfolio is ~ 80% CSD, a category that has seen less interest given health and wellness trends as consumers switch to both healthier carbonated and non-carbonated offerings versus traditional carbonated soda. DPS’s answer is DP 10, its newest offering that should have full distribution by the end of the summer. DPS says that the 10 calorie drink with a full taste profile (note: the lack of a full taste profile is often the complaint of diet drinkers) stands to address the health and wellness market. That said, the diet category across the industry is seeing declines, so it’s yet to be seen just how well DP 10 may be positioned and/or the cannibalization impact to its Diet DP product.   

 

Results: on the quarter, EPS met consensus at $0.84 (versus $0.85 last year) and revenue fell short of expectations at $1.61B vs the Street at $1.65B, or -0.6% year-over-year, and volume declined 4%. On the year, DPS reaffirmed its FY EPS guidance of $3.04-3.12, forecasts revenue up 2% (versus 3% previously), said it expects $375-400MM worth of common stock to be repurchased in 2013 (back-half loaded), and expects COGS (packaging and ingredients) to be up 1.5% (versus 2% previously).

 

Matthew Hedrick

Senior Analyst


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