Dr Pepper (DPS): The Poor Man's Monster Beverage; Bai Purchase to Drive Sustained Growth - Stifel
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Dr Pepper Snapple Group (NYSE: DPS) announced today that the company will purchase Bai Brands, LLC. DPS has been slowly grinding out U.S. share gains in carbonated soft drinks for years versus Coke and Pepsi. Stifel believes that this purchase creates short-term growth, as well as the potential for sustained added growth. The company is currently ranked as North America's third largest soft drink, with 90% of earnings and the vast majority of brand rights exclusive to the U.S.. Stifel believes that this purchase gives DPS another weapon in terms of bottling, and distribution, in order to carve out further stake in the industry.
Stifel analyst Mark Swartzberg commented, "We will see if Bai has staying power. We think the deal terms – $0.03 earnings dilutive next year, then accretive the following, or a preliminary estimated 2017 EBITDA multiple of 14.1x for $1.7 bn cash purchase price – are fair and create for Dr Pepper a contributor not only to short-term growth but potentially sustained added growth. For example, the question of distribution changes from the transaction arises, including whether Coke and Pepsi bottlers will carry Bai; irrespective of a given territory change, the key question for a given bottler is whether Bai is margin accretive (it is) and additive to growth (it is), so Dr Pepper acquires for itself another weapon to build industry share. Coke’s U.S. distribution of Monster, an allied brand, is evidence to us that Bai’s distribution course will continue to stem from brand strength, rather than the reverse."
The firm reiterated a Buy rating and $99 price target. The analyst said a case can be made that DPS is a poor man’s Monster, in terms of multiples (e.g., forward P/E 17.7x, Monster forward P/E 28.0x).
Shares of Dr Pepper Snapple closed at $85.25 yesterday.
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