Be a Pepper - Barron's

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.