Wednesday 13 November 2019

America's Dr Pepper and the massive business of fizziness

Share Watch

Fizzy drinks are seriously big business
Fizzy drinks are seriously big business

John Lynch

A reason many investors do not get excessively effervescent about the global soft drinks sector is probably because a lot think it begins and ends with Coca-Cola and Pepsi.

That is not the case as far as today's target company, Dr Pepper Snapple (current market value $14bn), is concerned. Dr Pepper, which features prominently on a lot of American teenage TV dramas every day of the week, is something of an American icon. It is also a spin-off from a company very familiar in Ireland, the UK multinational Cadbury Schweppes.

Cadbury got into the US drinks market in the early 1980s and over the next 30 years the business was built by the acquisition of brands like Canada Dry, Dr Pepper, 7Up and Snapple.

By 2008, Cadbury offloaded the business and that company now trades on the NYSE as Dr Pepper Snapple, rated as the third largest soft drinks outfit in the US.

The US accounts for some 85pc of group sales. It has a range of flavoured carbonated soft drinks and non-carbonated drinks like teas, juice drinks and mixers, but its portfolio of over 50 brands is biased towards drinks of the fizzy variety. The company also has an impressive array of US brands like Sunkist (orange juice), Mott's (apple juice), Squirt (grapefruit juice), Schweppes tonic, A+W (root beer) and Climato (tomato juice).

Six of the top 10 non-cola drinks in the US are Dr Pepper's and 13 of its brands are either number one or two in their category.

To meet these demands, it has 20 manufacturing facilities (two in Mexico), 130 distribution centres, 19,000 employees (the bulk in the US) and its own fleet of 6,000 delivery trucks.

The company has three business segments: packaged drinks, concentrates and Latin America. Packaged drinks sales account for $4.3bn of group sales, concentrates $1.2bn and Latin America $420m. Packaged drinks has key brands like Snapple, Mott's and Climato, in addition to Canada Dry and its flagship brand, Dr Pepper. Its largest customer is Walmart, with 16pc of group sales. The company has strong relations with outlets like Burger King, McDonald's and Subway, but is also focused on convenience stores and vending machines.

Anyone familiar with the drinks business in Ireland will be well aware of how crucial the concentrate segment is. Guinness, Coca-Cola and Pepsi have all shown how immensely profitable it can be. Dr Pepper has no lessons to learn in this respect. It makes concentrates for 7Up, Schweppes, Dr Pepper and Canada Dry, with concentrates accounting for 50pc of its profits.

Revenue was up $8m last year due mainly to price increases as demand was flat. The company also trades in Mexico and the Caribbean, mainly focused on mineral water and vegetable juices with sales of $420m.

Group revenue last year was $6bn, with net income of $625m, down marginally. The range of products generates strong cash flow, helping reduce debt of $2.5bn.

Like most US companies examined in this column, it has a share buy-back programme, most recently returning some $400m to shareholders.

Over the last five years, revenue has inched up less than 10pc while net profit rose by 18pc. Over the same period, its shares have moved from $30 to its present record high of $78 which has pleased investors, who have also seen dividend hikes in each of the six years since floatation.

However, whether the US soft drinks market can continue to make progress in the face of headwinds such as health consciousness; the focus on calorie intake and sugar content; competition from artificial sweeteners; and the perennial government concerns on the health costs of obesity, is a burning question.

In addition, the company needs to expand its non-fizzy range of products and market beyond the US. For these reasons, I would pass on the shares for the present.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

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