Dr Pepper (DPS) debuted at $10 billion on the NYSE last week, after shareholders pressured Cadbury to spin it off when an IPO plan failed. But CEO Larry Young says $25 shares are cheap. The No. 3 U.S. soda-maker trades at less than 13 times P/E, while rivals Coca-Cola (KO) and PepsiCo (PEP) trade at 18 times 2008 P/E. Barron’s says Dr Pepper should trade at a premium even to bottlers Coke (CCE) and Pepsi (PBG), who trade at 14 times estimated 2008 P/E.
That’s because more than 50% of Dr Pepper’s profits are from the high margin, brand name syrups it sells to bottlers. P/E growth is strong, and management has revived Snapple’s popularity, although last year’s energy drink Accelerade was a $55 million flop. There’s no dividend, the company will use cash to pay down $3.9 billion of debt (it has $6.5B in equity), Q1 outlook is soft and 2008 guidance is still unclear. Costs of raw materials like fructose and aluminum have spiked, but bulls say that’s already priced in. They also say fears of declining soda consumption in an increasingly health-conscious U.S. belie the two cups of soda American’s drink daily. Dr Pepper’s flavored drink business is also growing nicely. As UK Cadbury investors shed shares, investors could lap up 20-25% gains.
After Mars agreed to acquire Wrigley for $23 recently, there’s even greater pressure on Hershey’s and Cadbury to merge. Seeking Alpha's Wayne Mulligan says Cadbury sans Dr Pepper is much more nimble and in a better position to negotiate with an already-weakened Hershey.
In April, Reuters said that Cadbury had better speed up negotiations or they could be an acquisition target themselves. After all, if Buffett helped Mars buy Wrigley, and we know he likes Coke, there could be a trend here…