Jefferies Diagnoses Dr Pepper With A Buy Rating

Bolstered by a U.S.-centric strategy, stability in its base business and the continued trending of its Bai brand, Dr Pepper Snapple Group Inc. DPS earned an upgrade Friday from Jefferies, which issued a Buy rating and bullish outlook on the stock.

Jefferies believes the investment one of low risk and high reward, especially in light of recent underperformance and anticipated increases in consensus estimates.

Buy For Bai

Dr Pepper Snapple acquired Bai Brands in January for $1.7 billion, and the purchase lent the shaken soda company a huge boost.

Taking into account consumer shifts toward healthy beverages, Jefferies analysts said Bai’s growth capacity, estimated at 4.5 percent, is yet under-appreciated. They expect the brand to contribute two to three points of core corporate sales growth in the next five years.

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The firm predicts that Bai will grow at a 20-percent CAGR through 2022 — more than 5 percentage points higher than consensus — through product line extensions and international expansion.

Estimates Pop

Largely inspired by positive Bai outlook, Jefferies expects 5.5 percent annual organic sales growth across the company — a figure 2.5 percentage points ahead of consensus and 3 points ahead of guidance.

It elevated 2017 EPS estimates to $4.70 with at least one to two points of upside, although the figure does not reflect anticipated sales loss among Mexican consumers deterred by the nation’s soda tax.

Risks to the thesis include sugar taxes, macroeconomic trends and unexpected deceleration in bai sales.

Jefferies set a price target of $115, and as of publication, shares were trading around $94.67.