Credit Suisse Initiates Dr Pepper Snapple At Outperform

Shares of Dr Pepper Snapple Group Inc. DPS do not adequately reflect “the role of Allied Brands as the primary driver of growth and margins going forward,” Credit Suisse’s Laurent Grandet said in a report. He initiated coverage of the company with an Outperform rating and a price target of $108.

Dr Pepper Snapple’s shares are currently trading “at the lowest PE in our coverage group,” analyst Grandet stated, adding that Allied Brands could contribute significantly to “an already consistent financial algorithm.”

Allied Brands

The Allied Brands portfolio includes ten key entrepreneurial brands not owned by Dr Pepper Snapple. Grandet mentioned that these brands provide the company with:

• Exposure to new, fast growing segments
• A first-hand opportunity to invest in future brands platforms and entrepreneurs
• Growth, since collectively these brands represented ~50 percent of total company growth in the prior couple of quarters
• Margin expansion of ~400bps, since they offset the fixed costs of the declining core

Consistently Solid FCF

The analyst estimated that Dr Pepper generates around $1 billion of EBITDA, accounting for more than 80 percent of company operating profit, and about 70 percent of the total FCF, which could reach almost $900 million in 2016.

“The company has delivered a 3-year annualized TSR of 30% and we expect it will return 100% of free cash flow over the next 3 years through dividends (currently 2% yield) and share repurchases,” Grandet commented.

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