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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15 responses to “Dr Pepper Snapple (DPS) Spinoff”

  1. I looked at DPS’s income statement going back a few years. Revenue growth isn’t that bad but earnings have pretty much been flat. Haven’t looked at that previous analysis yet but a low PE is only good if they can grow EPS. I think their moat should be about as good as most PEP products. If your going to analyze them like in that cool pop up thing here’s my take on what I’d do atleast. I’d take the top competitors like KO PEP Cadbury and compare their gross and net profit margins, return on equity, price to free cash flow, compare their debt levels debt to equity. Id maybe see who grew earnings the fastest the last 5 years. HANS could actually be the best stock to buy just bc they could grow EPS a ton faster than DPS KO PEP. Of course their not as sure a thing as KO and atleast you get a dividend with KO but you can’t triple your money in a couple yrs with a dividend stock. DPS is pretty small compared to KO so that’s one positive thing. I don’t think DPS pays a dividend so thats a big risk if the stock is flat over the next couple yrs and you could have been getting a rising dividend yield in KO PEP assuming tehy will raise more.

  2. that pop up graphic is cool. How did you do that?

  3. HANS does have some good numbers. PEG .9

  4. Nurseb911 says:

    Thanks for this Jae. I don’t think I’ve even taken a look at this company, but I’m sure to do that today now that I know some more. I own KO, but I’m always interested in what possibly acquisitions or competitive changes companies I own may be exposed to.

  5. Anonymous11 says:

    Not a buy at this level. You frequently hear that it should be between KO/PEP and bottlers, but there are some factors that (imho) make them a 99% bottler.
    (1) Non-brands (face it, just because they have a “brand” does not mean it translates into pricing power, “brand equity” and so on. To paraphrase one of the many Buffet books, a store manager has to carry Coke. They do not need DPS).
    (2) No non-CSDs to speak of. Yes, they have the ice tea, and so does everyone else.
    (3) No int’l exposure. CSDs are on a long-term US decline.
    (4) Barely an IG credit.
    (5) Have not looked at them closely, but they might be sub-scale.

  6. Jae Jun says:

    @ Mark,

    Thanks for the comments. I had pretty much the same concerns and did a side by side comparison but decided to keep the data quite “bare”.

    But from going through the numbers it does seem like the market is pricing DPS more like a bottler. The key for me is to find out how true that is.

    Oh and the popup graphic is a plugin for wordpress only.

    I’m still reading the spinoff related reports myself. I also remember that you mentioned you were working on a post between KO and PEP. Interested to read it and see how DPS holds up.

    At $22, I’m not exactly convinced that it’s cheap enough as well so it’s on hold for further review at the moment.

    I too asked myself a Buffett question. “Would the business of DPS suffer if I had $1bil to compete against it?” I concluded it was a no.

    I think if DPS can prove their margins to be stable as well as show they can grow earnings (even though they are only in the Americas), then it could be an excellent alternative.

    Thanks for the pointers!

  7. Jae Jun says:

    For those interested, HSNI is another spinoff.

    I’ve been watching it closely and it’s now up 80% from its lows but I stayed away because I didn’t fully understand the tv network business.

  8. “the popup graphic is a plugin for wordpress only”

    cool. I should have figured that.

    I looked at soft drink companies awhile back. You may want to find out recent trends maybe its better now, who knows. But the big shift away from softdrinks to energy drinks, now teas, healthy etc. concerned me. This is from one of my first posts back in 07

    “Beverage Digest reported that the total sales volume of soft drinks in the United States fell 0.6 percent in 2006, following a 0.2 percent decline in 2005. The industry sold 10.16 billion cases of soft drinks in 2006, down from 10.22 billion in 2005(reuters.com).”The carbonated soft drink industry has moved from roughly 3 percent growth in the 1990s to modest declines in the last two years,” Beverage Digest reported, saying the estimate included energy drinks, a very fast-growing segment.”

  9. actually, now that I think about it that may not be such a big deal bc big growth is going to come from other countries anyway

  10. Jae Jun says:

    The thing with DPS: they have basically no international exposure. Cabury still owns the international business and DPS was spun off to take over the Americas business of US and Mexico.

  11. Anonymous11 says:

    You probably saw the results last Q. I am too lazy to do LTMs so last 9 mo EBITDA is 780 vs 820 for the PY period. Capex was 203 vs. 123. SO EBITDA- CapEx for the period was 577 vs. 697. Int coverage for the period dropped from 3.6x to 2.9x. I have not done any adjustments on some non-recurring items (and I do not think they disclose the fair value of their debt) but I’d be staying away from both the debt and the stock: the business is decelerating. Also, it seems that their intl exposure is in mexican pesos which will likely drop even further from the current levels. Not good either way.

  12. Jae Jun says:

    thanks for the input. I’ve been watching it, but didn’t feel it was a good choice in its current situation.

    I’ll keep a lazy eye on it but Im waiting patiently for a whole bunch of other opportunities.

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