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Inside Wall Street


Why Dr. Pepper Looks Fizzy

Dr Pepper Snapple Group (DPS) is the third-largest beverage company worldwide. (Only Coke and Pepsi are bigger.) But it's No. 1 in the $31 billion flavored noncarbonated-drink market and boasts such leading brands as Hawaiian Punch and Mott's, as well as the carbonated Canada Dry, 7Up, and Sunkist. Although the company has only 15% of the $72 billion soft-drink market, it is more undervalued than Coca-Cola (KO) or PepsiCo (PEP), analysts say. It was spun off on May 7, 2008, by Cadbury Schweppes. Since going public on the Big Board at 25 a share, the stock has slid to 13.10. Dr Pepper is trading at 6.17 times earnings before interest, taxes, and amortization, vs. Coke's 9.29 and Pepsi's 8.34, notes Kevin Hare of Spin-Off Advisors. Another plus, he adds, is activist investor Nelson Peltz, who pressed for the spin-off. As the largest stakeholder, he is expected to keep trying to boost the stock, probably by trying to separate the bottling operations from the rest of the company, says Hare, as Coke and Pepsi have done.

Damian Witkowski of Gabelli (it owns shares) rates the stock a buy and puts its intrinsic worth at 32. He sees it earning $1.70 a share in 2009 on sales of $5.6 billion and $1.90 in 2010 on $5.9 billion. Canada Dry, Dr Pepper, 7Up, and Sunkist each generate over $500 million in yearly sales.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

How Hunstman Might Explode

After months of litigation, specialty chemical outfit Huntsman (HUN), which makes products for the auto, construction, and aerospace industries, agreed in November to call off its sale to Apollo Global Management's Hexion Specialty Chemicals unit for a price of $6.5 billion. Apollo paid Huntsman $1 billion to pull out of the deal. Huntsman's suit against Credit Suisse Group (CS) and Deutsche Bank (DB), which backed off from financing the deal in October, is in court. Benjamin Segal, president of Winchester Capital Management, expects Huntsman to win and collect another $1 billion. "Huntsman—with its cash hoard, book value of $9 a share, and the stock's fall [to 2.43] from 24 last Mar. 13—is very undervalued," says Segal, who holds shares. The recession crimped sales, and analysts have avoided the stock. But big institutions such as Fidelity Investments and State Street (STT) own shares.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Smith & Wesson Is Packing Heat

Guns are in play on Wall Street—shares of weapons maker Smith & Wesson Holding (SWHC) (SWHC), that is. Its stock has shot up to 3.70 a share on Mar. 4 from a low of 1.58 on Oct. 28. It traded as high as 7.77 last Apr. 30.

S&W is benefiting from a surge in sales of handguns and rifles, partly because of thoughts that gun laws might be tightened by the Obama Administration. And a surge in demand from the U.S. military for both pistols and automatic carbines and rifles is anticipated.

"Robust industry sales and potential expansion of military business could drive fundamental momentum," says Rommel Dionisio of Wedbush Morgan Securities (it seeks to do business with S&W), who tags it a buy.

PriceTarget Research, which rates S&W "positive," has a price target of 5 a share based on a projected profit growth of 29% in 2009 and return on equity of 17.1%.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.


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