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Why Dr. Pepper Is Good for What Ails Investors


Recession drives Americans to drink...soda.

The downbeat economy is driving people to drink... Dr. Pepper?

Cash-strapped consumers want value. That's good news for Dr. Pepper, Snapple Group's (DPS) soft-drink division, but a kick in the gut for its more expensive iced tea and juice drinks.

Goldman Sachs rates the stock a "buy" and notes that it's climbed about 45% since March 10. "We see more upside potential," Goldman says in a research report.

US soda sales are stronger than anticipated, and Dr Pepper Snapple Group's profit margins are expected to improve, thanks to lower commodity costs.

Goldman Sachs raised its 2009 earnings estimate $0.05 a share to $1.68 for Dr. Pepper Snapple Group. It expects the company to earn $1.80 a share for 2010 and $1.96 for 2011.

Coca-Cola (KO) and Pepsi (PEP) recently reported favorable earnings, and this could boost investor confidence about future soft-drink sales in the current economy, Goldman Sachs says.

This plays out against Dr. Pepper's fourth-quarter $621 million loss due to write-downs on distribution rights for the Snapple brand. But the outlook is strong for less expensive drinks. Sales of Hawaiian Punch, a value-priced juice drink, jumped 19%. But sales of Snapple iced tea and juice drinks skidded 17% as consumers shunned expensive products.

The move to value drinks is a variation on the retailers theme: Wal-Mart (WMT) remains strong in the current economy as shoppers seek to stretch a buck, but traditional department stores such as Macy's (M) take a hit. Overall, auto sales have plunged to a level not seen since 1981. Luxury cars and SUVs have fallen off a cliff, but the few buyers in showrooms are interested in economy cars.

Until there's a rebound, value sells - and soft drinks continue to represent a good deal for millions of consumers.
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No positions in stocks mentioned.
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