Jim Cramer on Keurig Dr Pepper: “They’re Right to Break Up the Business”

Keurig Dr Pepper Inc. (NASDAQ:KDP) is one of the stocks Jim Cramer commented on. Cramer sees the breakup as a positive outcome for the company, as he remarked:

“If you want a company with a perfect track record of strategic decision making, whoa, this one is not for you. But if you want a company that’s finally headed in the right direction with a stock that’s gotten too cheap, then I think Keurig Dr Pepper makes a lot of sense. First, they’re right to break up the business. In retrospect, there were never any real benefits to combining a coffee machine company with a soda company. Wall Street likes bite-sized companies that are easy to understand…

This is how breakups create value. Money managers who were turned off by the combined entity might happily buy one of the components as soon as it trades separately. Second, in terms of valuation, now this is what really intrigues me, I think finally the stock has gotten way too cheap. If you use Keurig Dr Pepper’s current enterprise value… and divide it by the company’s trailing 12 months… EBITDA, you get an enterprise multiple of 8.5%. This is a metric we like to use in merger breakup situations…

Of course. that ignores the new debt that Keurig Dr Pepper’s going to have to take on to buy the JDE Peet. But even if we assume that they’re going to plan to borrow 18 billion, the stock would have an enterprise multiple of 11.4, which is still a huge discount to Coke and a small discount to Pepsi. I think this gap is pretty compelling. Of course, there will likely be twists and turns over the next year and a half as this merger breakup unfolds.

So I need more details before having real conviction in the new companies that will be created by the breakup. But the bottom line: Regardless of how Keurig Dr Pepper got to this point, I think the breakup could unlock a tremendous amount of value. Given how much the stock’s come down since the announcement, I think you have to be a buyer here, not a seller, as shocking and contrarian as that is to the current Wall Street wisdom on the matter.”

Photo by Adam Nowakowski on Unsplash

Keurig Dr Pepper Inc. (NASDAQ:KDP) produces and distributes a wide portfolio of beverages and single-serve brewing systems, including soft drinks, coffee, tea, and specialty drinks.

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Disclosure: None. This article is originally published at Insider Monkey.