Dr Pepper Snapple Group (DPS)

The Dr. Pepper Snapple Group is a recent spin-off, offering patient investors the opportunity to earn outstanding risk-adjusted returns over the next few years. Using a variety of valuation methods I get an intrinsic value no less than $30 a share, with further potential upside if things unfold as I believe they likely will...

The bottom line is DPS is an above average business currently trading at a below avg. multiple. This is simply to cheap for such a high quality competitively advantaged company, period.

For example...

It currently trades at a lower multiple than a typical pure play bottle and distibution business! True, DPS deserves to trade at a discount to its larger competitors KO and PEP (both of which spun off their more capital intensive bottling operations years ago, have considerably more opportunity overseas, better brands, etc. and hence deserve a premium).

Yet taking all of this into consideration, I believe a roughly 20% discount to its peers makes sense. This more appropriate multiple would put DPS north of $35...

Additionally, I believe that DPS's future financial results should be considerably better than they have been historically. This provides real opportunity. Reasons for this conviction stem from the variety of levers management has at its disposal to improve profitability over its first few years as a stand alone company.

Examples include

1) The ability for Mgmt. to spin off its more capital intensive bottling business, creating significant shareholder value in the process. Both companies would warrant higher valuations as independent pure plays rather than continuing as a combined entitiy.

2) Current restructuring should result in a much more flexible and efficient company (at least relative to its past). Management's focus on improving core operations and intelligently allocating capital to grow the business should translate into consistently higher profits down the road (hopefully leading the market to award those higher profits with a higher multiple).