Dr Pepper Snapple shares rise with analyst upgrade

NEW YORK

Shares of Dr Pepper Snapple Group Inc. rose on Thursday after an analyst upgraded the stock, saying the drink maker's business will improve and shareholders will reap profits from payments related to consolidation within the industry.

UBS analyst Kaumil S. Gajrawala upgraded shares to "Buy" from "Neutral" and boosted his target price to $42 from $31.

Shares rose $1.26, or 3.7 percent, to $34.91 in midday trading, after setting a new 52-week high of $35.24 earlier in the session.

Gajrawala said the company's shares have room to grow because they are still not taking into account improvement in operations and the company's share repurchase. He said shares have grown 25 percent in the last month.

The company, which was spun off in 2008 from Cadbury Schweppes, received $900 million before taxes from PepsiCo Inc., after that drink maker bought its bottlers, and used that to pay down debt.

A similar consolidation by Coca-Cola Co. should get Dr Pepper Snapple an additional $800 million to $1.1 billion, "all of which will likely be returned to shareholders," he wrote.

PepsiCo paid Dr Pepper Snapple the money as part of the process of buying PepsiCo's bottlers and taking over their agreements with other beverage companies, including Dr Pepper Snapple. The same thing is expected to happen because of a deal by Coca-Cola to buy the North American operations of its bottler, Coca-Cola Enterprises Inc.

Gajrawala said Dr Pepper Snapple, which is based in Plano, Texas, should continue to boost its sales volume by expanding distribution and pitching to Hispanic shoppers outside its core markets. The company makes Sunkist soda, 7UP, A&W, Canada Dry and other beverages.

Deutsche Bank-North America analyst Andrew Kieley told clients in a note Thursday that company executives were upbeat in a recent meeting on their prospects for growth, ability to invest and yield of higher cash returns to shareholders.

"Keeping pace with potentially more-aggressive promotion by competitors remains a risk in our view, but management expects the net result to be better category growth, rational price, and good focus on Dr Pepper Snapple brands," he wrote. He rates the stock a "Hold" with a $35 target.

Both analysts estimate the company will earn $2.33 per share in fiscal 2010. Analysts predict a profit of $2.30 per share, according to Thomson Reuters.