Cadbury Schweppes: Sweet Empire
"Cadbury Schweppes shares plummet as humanity rejects sweets." That's one headline you're not likely to see and about the only circumstance that might topple the shares of the London-based company, the world's biggest confectionary producer. The question is, How well can the firm squeeze more profits from its vast, sugar-coated empire?
And vast it is. Cadbury Schweppes (symbol CSG) holds 10% of the world sweets market and has huge shares of all three major segments -- chocolate, sugar and gum. Its well-known brands in the U.S. include Dr. Pepper, 7 Up, Mott's, Sunkist, and, of course, Clamato. At any given time, millions of people on six continents are chewing its gum brands (including Trident, Dentyne, Bubbaloo, Timorol and Wedel).
Cadbury is just the kind of stock you'd like to own if you think the economy is slowing. Consumer-product companies with strong brands tend to be recession proof. People will always spring for a chocolate bar or a bottle of Yoo-Hoo.
Ironically, some analysts are bullish on the stock because the company is going on a diet. The company plans to close about 26 of its 133 factories worldwide and cut its workforce by 10%. It's also selling off whole businesses, including its European beverage unit. Cost cutting is expected to yield savings of about $700 million by next year, says Steven Ralston of Zacks Equity Research, which on November 27 issued a buy recommendation on the stock. The shares closed November 28 at $41.34, up 24 cents for the day.
The cost-cutting campaign is already showing benefits. While rising oil and transportation costs hurt the company's profits last year to the tune of $91 million, cost savings amounted to $155 million. Two things the company doesn't plan to scrimp on are new-product development and marketing. So expect media blitzes on Snapple White Tea and Diet Cherry Vanilla Dr. Pepper.
Ralston estimates that sales will rise from $12 billion in 2006 to $12.6 billion next year, and that earnings per share will rise from $2.48 this year to $2.66 in '07. Based on next year's estimate, the stock trades at less than 16 times earnings, which is reasonable -- maybe even too low -- for a low-risk, profitable company with a projected annual earnings growth rate of 7% over the next five years. Expect Cadbury Schweppes to thrive on a universal constant: the Sweet Tooth.