Dr Pepper faces lukewarm U.S. homecoming

NEW YORK (Reuters) - Dr Pepper Snapple Group Inc DPS_w.N shares will start trading in the United States this week, but Wall Street is not welcoming back the soft drink maker with open arms.

The Texas-based maker of Dr Pepper and Hawaiian Punch is being spun off from Britain's Cadbury Plc (CBRY.L), which took it over in 1995. It will trade on the New York Stock Exchange under the ticker DPS (DPS.N) starting on Wednesday.

"When issued" shares debuted last Monday at $29 but fell 11 percent by Friday, closing at $25.80. That was below expectations for trading above $30.

Analysts are skeptical about the prospects of the company, which lacks its own popular beverages in the sports and energy drink segments and gets most of its sales from the United States, where the economy is faltering, commodity costs are soaring and sales of traditional soft drinks are slipping.

David Liston, equity analyst with Barclays Wealth in London, said he would not recommend British clients keep their Dr Pepper shares after the spin-off.

"There are a few issues and nothing exciting which might overcome my reluctance to go into a New York-listed stock for U.K. shareholders," Liston said. He expressed concerns about the balance sheet strength, the turnaround of Snapple, whose sales have sagged for years, and the company's standing as a distant third behind Coca-Cola Co (KO.N) and PepsiCo Inc (PEP.N).

Coke had 43 percent of the U.S. carbonated soft drink market in 2007, while Pepsi had 31 percent, according to Beverage Digest. Dr Pepper had 15 percent, but that was up slightly, while the cola giants' shares were slightly down.

The company, most recently known as Cadbury Schweppes Americas Beverages, has cited its range of flavored sodas like Dr Pepper, Schweppes ginger ale and 7UP for outperforming the U.S. soft-drink market, whose volume shrank last year as health-conscious consumers choose drinks they see as healthier or more beneficial.

The change of corporate headquarters from London to Plano, Texas, will also prompt trading by index funds, whose holdings track specific indexes.

Colin Goldin, a derivatives analyst for Credit Suisse, said funds linked to the U.S. large-cap Russell 1000 index .RUI will buy Dr Pepper shares, but that demand will be more than offset by selling by funds aligned to Britain's FTSE 100 .FTSE and MSCI's main global equities index .MIWDOOOOPUS.

Goldin recommended short-selling Dr Pepper shares on Wednesday -- a strategy where traders borrow shares and sell them, expecting the price to drop. When it does, they buy back the shares, return them, and pocket the difference.

"(The stock) may not fall an awful lot further from here," Liston said on Friday. "But it's probably not going to go up much either. It now very much depends on the shareholders and institutions out there (in the United States)."

HOMETOWN AMBIVALENCE

Judy Hong, beverage analyst for Goldman Sachs in New York, is starting coverage of Dr Pepper shares with a "neutral" rating and a $32 price target. She estimates the company can earn $1.87 per share in 2008 and $2 per share in 2009, with 6 percent to 7 percent earnings growth long term.

Hong said the fact that Dr Pepper's bottling business and drink concentrate business are integrated should earn it a premium valuation to pure-play bottlers like Coca-Cola Enterprises Inc (CCE.N) and Pepsi Bottling Inc (PBG.N), which have price-to-earnings multiples of 15 and 14.3, respectively.

At the same time, its limited exposure to growth areas, low-return bottling assets and greater cash requirements should cause it to trade at a discount to Coke and Pepsi, which trade at 19.3 and 18.3 times this year's earnings estimates, respectively.

Hong's model and price target imply a multiple of 17.1 for Dr Pepper.

Steve Dixon, manager of the Global Beverage Fund at Arnhold & Bleichroeder in New York, said $27 was "about fair" for Dr Pepper shares, but that he has no short-term plans to buy unless it dips to the low $20's -- an event that may not be impossible, even in the longer term.

Dixon said Dr Pepper, which owns most of its bottlers unlike Coke and Pepsi, could one day lose the business it has bottling and selling Hansen Natural Corp's (HANS.O) Monster energy drinks to Coke or Pepsi. Without a super-caffeinated energy drink of its own, sales and profits would suffer.

"I think it's a risk that probably isn't being fully appreciated," Dixon said.

Dr Pepper gets nearly 90 percent of its sales from the mature and highly competitive U.S. market, versus only two-thirds for Pepsi and less than a quarter for Coke.

Gary Bradshaw, portfolio manager with Dallas-based Hodges Capital Management, which owns shares of Coke and Pepsi, said Dr Pepper's domestic focus would make him pause because of the weak U.S. economy.

"It'd be hard for me to get overly excited about Dr Pepper Snapple unless it kept coming down," Bradshaw said. "Because we continue to expect the U.S. consumer to be constrained."

But Morningstar analyst Mitchell Corwin said over time the strong cash-flow characteristics of the beverage business imply a higher valuation for the stock than the mid-$20 range.

"It's not a high-growth business, but it's a business that generates a robust cash flow," Corwin said.

In the de-merger, shareholders with 100 Cadbury Schweppes shares receive 64 shares of Cadbury and 36 shares of "Cadbury Beverages," which become 12 of Dr Pepper.

(Reporting by Martinne Geller; Editing by Steve Orlofsky)