Cadbury: A Little Too Optimistic

Includes: CBY, MDLZ
by: Véronique Adam

Conclusion: We feel that the new long term targets (+5-7% sales pa, 16-18% margin by 2013) should be difficult to achieve. We reiterate our view that the stock looks fully priced.

Organic revenue growth of 5-7% per annum, compares with 6.3% achieved between 2004 and 2008, which looks feasible. However, mix and pricing accounted for more than two thirds of that growth in the recent period. Going forward, Cadbury will have to rely more on volume at a time when consumers are more reluctant to pay a premium for staples. As a result, we think that the high end of the range looks very optimistic in the absence of significant pricing action. We are also surprised to see Cadbury raising its sales growth target while other food companies confirm lackluster demand in developed markets.

We feel even less convinced on the margin front. 16-18% margins by 2013, implies more than 90bp gain pa, compared to 40bp pa achieved between 2004 and 2008. Hershey (NYSE:HSY), Nestle (OTCPK:NSRGY) or Lindt (OTCPK:LDSVF) margins are very far from that target. COGS is higher in chocolate and does not leave much room for manoeuvre. In addition, it will take time to enhance margins in Continental Europe (20% of sales) where Cadbury lacks scale and leverage.

We continue to expect Kraft (KFT) to slightly improve its offer but think investors should not refuse an offer between p790-p860 ($12.91-$25.58) per share.

Disclosure: No position