New York, May 6 - There will be a new entrant to the pure-play beverage sector Wednesday, when shares of Dr Pepper Snapple Group Inc. begin trading on the New York Stock Exchange.
Dr Pepper Snapple is the spinoff of Cadbury Schweppes PLC and the company debuts at a time when the U.S. beverage industry is grappling with the economic slowdown here, soaring commodity costs and weakening consumer demand for carbonated soft drinks. The company sells ready-to-drink Snapple teas, Mott's apple juice, Hawaiian Punch and Dr Pepper drinks.
The stock has been trading on a "when-issued" basis and was recently at about $25.70, giving it a market capitalization of about $6.5 billion based on about 253 million shares outstanding. It is tiny compared with its much bigger rival soda makers, Coca-Cola Co. and PepsiCo, both of which have a market cap of more than $100 billion.
Dr Pepper Snapple, or DPS, sells its beverages in the U.S., Mexico and Canada and unlike rivals Coke and Pepsi won't be able to look to emerging markets in Asia and other parts of the world to offset a slowdown in the U.S.
In an April 29 note, Goldman Sachs initiated coverage of Dr Pepper Snapple Group with a "neutral" rating and a $32 12-month price target. "On a relative basis we believe the stock should trade at a discount to concentrate peers and a premium to the U.S. bottlers," noted Goldman analyst Judy Hong. Coke and Pepsi are the suppliers of beverage concentrate to bottlers like Coca-Cola Enterprises Inc. and Pepsi Bottling Group Inc..
Based on a $27 stock price, the Goldman analyst put the 2008 price to earnings ratio for Dr Pepper Snapple at 14.5, while Coke and Pepsi both had a higher valuation at 18.9 and 18.6 respectively. Coca-Cola was recently at about $58.20 and PepsiCo was at about $68.35.
Still, industry watchers say that DPS has some strong brands to tap. In particular, they point to the company's presence in the fast-growing market for ready-to-drink tea.
"On the non-carbonated side they have some strong trademarks like Snapple," said Gary Hemphill, managing director at the consultancy Beverage Marketing Corp.
Snapple has lost market share due to tough competition from other brands like the Lipton teas marketed by PepsiCo. But the brand picked up steam last year and in 2007 volumes of Snapple's ready-to-drink teas rose 13%, according to industry publication Beverage Digest.
Snapple, however, has had a mixed history under different owners. Quaker Oats Co. bought Snapple in the nineties but had to sell it at a loss to Nelson Peltz's Triarc Cos.. Snapple had a turnaround under Peltz and was ultimately sold to Cadbury Schweppes PLC.
Dr Pepper Snapple is being broken off from candy maker Cadbury, which had initially tried to sell the North American beverage business. But the credit crunch stymied that deal last year and Cadbury ultimately decided to spin off the beverage unit as a separate company.
Investors interested in the new stock may not see any dividends for some time. Dr Pepper Snapple has said that it currently intends to retain cash generated from its business to repay its debt and for other corporate purposes, and doesn't expect to pay any cash dividends in the short term.
"We expect earnings growth over the long term could be limited relative to beverage peers because of a high exposure to U.S. carbonated soft drinks, disadvantaged competitive position, low return bottling assets, and limited balance sheet flexibility," said Goldman's Hong.