Eight Reasons Dr. Pepper is Losing Its Fizz

Shares of Dr. Pepper (DPS) have been trouncing those of Coca-Cola (KO), PepsiCo (PEP) and even Monster Beverage (MNST) this year–but today it’s getting pounded thanks to a Citigroup downgrade.

Sure, it’s been a great year for Dr. Pepper Snapple. It’s gained 21% so far this year, easily besting PepsiCo’s 6.5% rise, Monster Beverages 6.9% advance and Coca-Cola’s 1.4 % increase. Now, however, it’s time for Dr. Pepper’s shares to “take a breather,” explain Citigroup’s Wendy Nicholson and Peter Chun:

Dr. Pepper Snapple has appreciated 22% year-to-date, far outpacing Coca-Cola, PepsiCo, Monster Beverage and the S&P500. This relative outperformance comes despite Dr. Pepper Snapple’s outlook for only 0%-1% top line growth (with volumes expected to be down more than 1%) and 6%-8% EPS growth in 2014. With this big move in the stock now behind us, we downgrade Dr. Pepper Snapple to a Neutral rating. Our reasons for the downgrade are as follows:

– U.S. CSD category growth has improved, but not by much;
– Dr. Pepper Snapple intends to reduce ad spending while its big competitors intend to increase it, and we fear that this could pressure Dr. Pepper Snapple’s market shares;
– Snapple has historically been an iconic brand, but it is too small to really move the needle for Dr. Pepper Snapple , and overall, Dr. Pepper Snapple’s stills portfolio is struggling;
– Dr. Pepper Snapple’s RCI initiatives are impressive and ongoing, but despite lower advertising spending this year, we don't expect much margin expansion, and we wonder if the balance sheet improvements are largely behind us;
– From a stock market perspective, investor rotation away from EM's (which has benefitted Dr. Pepper Snapple) has probably largely played out;
– DPS's cash flow has been terrific for a while – but an extra "kiss" from either Coca-Cola or PepsiCo seems unlikely in the near term;
– Dividend yield is no longer the best in the group; and
– Valuation is no longer as compelling as it had been

Shares of Dr. Pepper Snapple have dropped 1.1% to $58.66 at 3pm today, while PepsiCo has dipped 0.2% to $88.24 and Coca-Cola has risen 0.2% to $41.82. Monster Beverage has dropped 2.1% to $71.68 on reports Goldman Sachs might have lowered estimates.