Dr Pepper Snapple (DPS) Spinoff


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In part four of the series on special situations, I’ll briefly present a recent spinoff. Dr Pepper Snapple.

This series is based on the book You can be a stock market genius! so for additional information, be sure to read it yourself.

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Part 1: Odd Lot Tenders

Part 2: Book review on You can be a stock market genius!

Part 3: Spinoffs

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As mentioned in part 3, a spinoff presents exceptional opportunities as it is immediately under selling pressure while the value of the spinoff is still not realized.

A recent spinoff that I have been watching is Dr Pepper Snapple (DPS). DPS is the third largest beverage company by market share behind Coca Cola and Pepsi. In terms of its business, I would think it offers just as much stability and predictability as KO and PEP but always comes in 2nd or 3rd best. Never the leader. Never will be.

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I won’t be going into all the business aspects but will provide a simple valuation of what I think could be the value. For a more detailed look at the business, My Value Idea and Future Blind have already presented an excellent analysis of DPS. (My Value Idea wrote 3 parts to DPS). Greenlight Capital also gives a brief mention of DPS in their letter to investors on pg 5 and 6.

Valuing Dr Pepper Snapple

The difficulty with calculating an intrinsic value for spinoffs is that there isn’t enough detailed financial details to try and come up with something concrete. So assuming you’ve read a few of the mentioned posts, let me try and apply some very simple numbers together and see where it takes us.

Looking at the numbers, we see that DPS compared to the competition looks cheaper. The only factor is the CROIC, where it seems to be performing like a bottler. Does this imply that DPS is unable to translate investments into cash? Maybe.

From one of My Value Idea’s post he mentions that DPS should be priced cheaper than Coca Cola but more than the bottling operations of Coca Cola Enterprises. Pondering on this, this is actually a very good way to look at it since DPS runs both the concentrate and bottling and distribution business yet won’t be able beat Coke in its distribution method and margins.

With that in mind, I would say that a P/E range of 11 to 14 is reasonable given I don’t believe the franchise and brands to be as strong as Coke or Pepsi. This gives a price range of $25-$32 using 2007 EPS of $2 and adding back in one time expense to give an EPS of $2.28.

Be wary that I came up with this range without giving much thought about the future of the business. So basically, assuming 0% growth, I am valuing DPS at $25-$32 today. It’s currently trading at $21.68 which is only around a 14% discount to the low end.

Pricewise, it’s not at a big enough margin of safety for me to consider purchasing. I would definitely like to see it at $13 or $15 to offset my concerns about how the bottling ownership affects the returns and to combat my simplicity and rash calculations. But when looking at the recent restructuring, which will cut costs, moat and predictability it seems like a worthy candidate with a price tag labeled as value.

It could be an alternative to KO and PEP. Any thoughts?

Disclosure: No positions in any stocks mentions.

[tags]dps, Special Situation, spinoff,intrinsic value, pep, ko[/tags]

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