Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Wednesday, August 20.
As we’ve been saying, a sector accounts for 50% of a stock’s value. So when using Cramer’s 10-point rating system, a good sector can earn a company as much as five points.
- In this environment, one where inflation has peaked but the economy has yet to rebound, food and beverage sector, is perfect. These defensive stocks are just the type money mangers look for during times like these. Plus, there’s another important factor at work here: Mars’ acquisition of Wrigley at a nice premium. That puts Hershey and Cadbury, the only two pure-play candy companies left, in position to possibly be taken over. So score five points for each.
- Then we look at growth. Just last Friday, Aug. 15, Hershey cut its outlook for 2008 and 2009. Cadbury, however, reported beat earnings expectations for the most recent quarter. Cadbury said profits for this year were still on track and even noted that sales growth was ahead of company estimates. So a point goes to Cadbury, while Hershey loses a half point. Score: 6-4.5, Cadbury.
- Next up is strategy and execution. Cadbury brings in most of its sales from overseas, and recently spun off its North American beverage unit, Dr. Pepper Snapple, to become a pure candy play. Hershey’s largely landlocked here in the U.S., and recently the manager of the Hershey family’s trust, which owns 78% of the company, said they were adamant that ownership not change hands, so much for takeover potential. That’s one point for Cadbury, and minus one for Hershey. Score: 7-3.5, Cadbury.
- Hershey does actually win in the dividend category, offering 3.2% to 2.5% for Cadbury. Of course, that’s only because Hershey stock has declined so much. Give ‘em half a point. Score: 7-4, for Cadbury.
- When it comes to management, the scales tip back toward Cadbury. Heshey’s CEO is brand spanking new, and Cramer never invests with a first-year chief executive. Too much room for error, he said. Give a half point to Cadbury here. Score: 7.5-4, Cadbury.
- Now we have to take into account raw costs. Cadbury, with its 10.4% global market share is in a better bargaining position with suppliers than Hershey, which has only a 5.1% share. Cadbury also has done a good job of passing on price increases to its customers without losing them. Hershey, on the other hand, lowered its guidance because it expects a recent 10% price increase to cut into profits. A half point goes to Cadbury. Final score: 8-4, Cadbury.
- The final step is to compare our rating with the markets. As Cramer said, a price-to-earnings multiple is the only way to compare stocks apples to apples, so to speak. Hershey, despite its apparent underperformance, trades at 20 times next year’s earnings versus 17 for Cadbury. And that’s not even taking into account Cadbury’s higher growth rate. This makes Cadbury, at least for now, the much more likely takeover target. “Now that Wrigley’s going private,” Cramer said, “I think it’s Cadbury that you want to buy in the candy aisle.”
Cramer is expecting technology stocks to make their seasonal move after Labor Day, and Amazon.com is his way to play it. An incredibly strong quarter and a product with iPod-like potential are the big factors Cramer sees. Including items and one-time gains, Amazon reported a huge 46% earnings upside back on July 24. Even more important are the sales numbers. Revenues were $100 million, or 2.5%, more than the Street expected. So while the rest of retail was struggling, Amazon earned 41% more in year-over-year sales growth. You might think that high gas prices fueled higher online shopping than visits to brick-and-mortar stores, but at the end of the day Amazon is a just retailer, Cramer said. And with inflation coming down, this company should end up doing ever better.
Then there’s the Kindle, Amazon’s e-book reader, which accounted for 10% of all books sold last quarter. Cramer said the projected 400,000 units sold by the end of the year look like Apple iPod numbers. So “it looks like Amazon has a major gadget on its hands.” He called the Kindle a “game changer.” Amazon also stands out when you compare the company to others in the online space. Amazon has better operating growth than Google and it is beating eBay in sales volume and customer acquisition. Amazon’s margins are lower than Google and eBay, but Cramer said that just makes it easier to add new products and services – like the Kindle and the Prime program, which offers free shipping for a yearly subscription fee.
A new service, AmazonFresh, is being tested. It’s an online grocery store where customers who order before midnight have their orders by dawn. It just makes sense for Amazon to move in this direction – they sell everything else, why not food? Cramer thinks there’s potential here. Amazon is a buy trading at or near $80 a share.
Seeking Alpha publishes a summary of Jim Cramer's stock picks every day including: Mad Money Recap, Lightning Round and Stop Trading!
Get Cramer's Picks by e-mail -- it's free and takes only a few seconds to sign up.
Seeking Alpha is not affiliated with Jim Cramer, CNBC or TheStreet.com