DPS Enters into Distribution Agreement with PepsiCo

Analyst Michael J Branca of Barclays Capital maintains his “overweight” rating on Dr Pepper Snapple Group (NYSE: DPS), while adjusting his estimates for the company. The target price for DPS has been raised from $32 to $33.

Dr Pepper Snapple has reached an agreement with PepsiCo to distribute select brands that are currently distributed by PAS and PBS. Under this distribution agreement, DPS will receive a onetime upfront pre-tax payment of $900 million. The company will use part of the proceeds to reduce its debts, Barclays Capital says.

Dr Pepper Snapple will be able to distribute ten million cases of PepsiCo products with minimal incremental capital requirements and high margins. The analyst believes that DPS is likely to reinvest part of its incremental earnings for future growth. Barclays Capital has reduced its EPS estimate for 2009 from $1.98 to $1.96 and has raised its EPS estimate for 2010 from $2.30 to $2.40.