Dr Pepper Upgraded By RBC, Firm Says It Had 'Wrong Diagnosis'

• Dr Pepper Snapple Group Inc. (NYSE: DPS) shares have climbed 16 percent in the last three months, even after hitting a low of $75.02 on August 25.
• RBC Capital Markets’ Nik Modi upgraded the rating for the company from Underperform to Sector Perform, while raising the price target from $68 to $90.
• The earlier Underperform rating had been a wrong diagnosis as the company has been executing strongly and has undertaken initiatives that could provide upside to earnings, Modi mentioned.

Analyst Nik Modi said that the rating for Dr Pepper had been cut to Underperform in late 2014 after the surge in shares.

The Underperform rating reflected the stock’s “seemingly lofty valuation, our concerns over upside to RCI benefits, ongoing pressure on its core portfolio and stepped up promotional activity from KO on flavored CSDs,” Modi said.

He added, however, that over the past year, Dr Pepper has been generating robust RCI savings, while The Coca-Cola Co (NYSE: KO) has exhibited “renewed discipline” on pricing.

Moreover, there has been an improvement in Dr Pepper’s core business and the company’s allied brand strategy offers upside to volume growth. “We got this one wrong,” the analyst commented.

Modi mentioned that Dr Pepper has undertaken some initiatives that could provide upside to earnings:

1. Positioning the company as the preferred distribution partner for up and coming beverage brands
2. COGS deflation, which could boost margin expansion
3. Pricing realization remaining strong, given that both Coca-Cola and PepsiCo, Inc. (NYSE: PEP) are witnessing forex headwinds, which could continue into 2016
4. Execution on marketing initiatives, which are targeting growing demographics like Hispanics, sports and EDM.

“With that said, at 21x NTM P/E, DPS is already one of the most expensive stocks in consumer staples and we struggle to see the stock rallying from current valuation levels,” the RBC Capital Markets report added.