Student
Managed
Fund
Stock Research Report
By Todd Shrier and Philip Odackal
Cadbury Schweppes PLC (CSG)
Business Summary
Cadbury Schweppes plc, its subsidiaries and associated undertakings are
principally engaged in the manufacture, distribution and sale of branded beverages and
confectionery, as well as related foods. It supplies its products through wholesale and
retail outlets of the confectionery, licensed, catering and grocery trades in almost 200
countries worldwide. The Company is focused on the beverages and confectionery
businesses and manages an extensive portfolio of brands. In confectionery, Cadbury
Schweppes has manufacturing facilities in 25 countries and markets a range of
chocolates, gum and sugar confectionery brands in over 170 countries in the form of bars,
blocks, bagged products, packets, rolls, boxed assortments, chocolate eggs and novelties.
Products are sold through confectionery outlets, garage forecourts, convenience and
grocery stores and kiosks.
Financial Data/Ratio Comparison
As evidenced by the tables below, CSG sales during the past five and ten years
have grown at a negative rate. Despite such inauspicious findings, CSG sales growth
possesses a decidedly bright future. Throughout the next five years, it is estimated that
sales growth will reach 4.66%, against an industry average of 2.59%, while sales growth
over the next seven years is expected to total nearly 7.5%. The short-term trend of a
14.7% sales growth rate, over last year’s quarter, compared to an industry average of
7.4%, also supports a positive outlook for the years to come.
Growth Rates(%)
Company
Industry
Sector
S&P 500
Sales (MRQ) vs Qtr. 1 Yr. Ago
14.70
7.40
7.55
12.17
Sales (TTM) vs TTM 1 Yr. Ago
-0.51
7.97
6.78
10.93
4.66
2.59
3.84
9.68
EPS (MRQ) vs Qtr. 1 Yr. Ago
-58.27
15.49
7.92
25.44
EPS (TTM) vs TTM 1 Yr. Ago
-29.35
16.10
15.35
21.47
-1.63
7.10
9.68
10.37
6.22
-2.56
-0.84
5.18
Sales - 5 Yr. Growth Rate
EPS - 5 Yr. Growth Rate
Capital Spending - 5 Yr. Growth Rate
Financial Highlights (All data for latest 12 months)
Sales
ANNUAL RATES
Past
of change (per ADR) 10 Yrs.
Sales
-1.0%
‘‘Cash Flow’’
3.0%
Earnings
4.0%
Dividends
3.5%
Book Value
4.5%
9.30 Bil
Past
5 Yrs.
-0.5%
5.0%
8.5%
1.5%
7.5%
Est’d ’99-’01
to ’06-’08
7.5%
6.5%
13.0%
5.5%
8.5%
Student
Managed
Fund
Stock Research Report
By Todd Shrier and Philip Odackal
When evaluating the ratios below, it becomes apparent that the P/E ratio is
significantly below both the industry and the S&P 500. Such a result suggests the stock
may in fact be under-priced, especially when taking into consideration the fact that
earnings estimates are expected to increase $0.19 per share in 2004. Favorable projected
earnings estimates coupled with increased sales growth rate expectations, tend to favor
price appreciation over the coming years. A potential source of price appreciation also
stems from the diminished price to sales, price to book, price to tangible book and price
to cash flow ratios, as compared to the industry. Another encouraging sign lies in each
and every dividend ratio. A higher proportion of earnings in the hands of shareholders
represents a strong commitment to increasing shareholder value. It is also significant to
note that the historical returns on capital have been below our optimal range of 15%,
however, these values are expected to continually increase from 2003 through 20062008.
Valuation Ratios
Company
P/E Ratio (TTM)
Industry
Sector
S&P 500
18.95
24.07
21.12
25.65
P/E High - Last 5 Yrs.
NA
70.72
46.34
47.62
P/E Low - Last 5 Yrs.
NA
22.78
18.16
16.17
Beta
0.04
0.34
0.23
1.00
Price to Sales (TTM)
1.40
4.23
2.63
3.44
Price to Book (MRQ)
2.53
7.58
7.23
4.27
Price to Tangible Book (MRQ)
NM
12.87
14.98
7.26
Price to Cash Flow (TTM)
13.98
18.92
16.25
18.83
Price to Free Cash Flow (TTM)
42.11
40.61
35.24
32.25
4.53
58.07
54.00
64.10
% Owned Institutions
Dividends
Company
Industry
Sector
S&P 500
Dividend Yield
2.93
1.58
2.38
2.05
Dividend Yield - 5 Year Avg.
2.60
1.26
2.13
1.38
Dividend 5 Year Growth Rate
5.03
5.65
6.93
6.30
56.01
37.91
38.97
27.64
Payout Ratio (TTM)
Earnings Estimates
Average Estimate
Qtr(9/03)
NA
Qtr(12/03)
NA
FY(12/03)
2.07
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 © VALUE LINE PUB., INC. 06-08
8.7% 9.3% 10.9% 8.0% 15.4% 14.4% 9.6% 10.6% 10.7% 12.5% 8.0% 8.5%
Return on Total Cap’l 11.0%
FY(12/04)
2.26
Student
Managed
Fund
Stock Research Report
By Todd Shrier and Philip Odackal
Institutional Ownership
As illustrated by the table below, there exists a clear trend of buying behavior.
The three month net change in shares purchased exceeded the three-month change in net
shares sold by 839,648. Furthermore, institutional buyers exceeded institutional sellers
by 23. Each set of data indicates optimism in the productivity of CSG’s operations over
the coming year in addition to the belief that CSG shares may in fact be undervalued over
this time period as well.
% Shares Owned:
% Change in Ownership:
# Institutions:
Total Shares Held:
3 Mo. Shares Purchased:
3 Mo. Shares Sold:
3 Mo. Net Change:
Ownership Summary
4.5
Price Range Quarter:
3.80
# New Buyers:
107
# Closed Positions:
22,950,759
2,558,308
# Buyers:
(1,718,660)
# Sellers
839,648
# Net Buyers:
$19.76 - $25.61
21
13
64
41
23
Benchmark
A chart comparison against PepsiCo, Coca-Cola and the S&P 500 clearly bodes
unfavorably for CSG over the past year. However, we strongly feel that a turnaround is
in store due, in large part, to the “Fuel for Growth” initiative announced in October. To
clarify, CSG released nearly 5,500 employees, as a result of the $4.3 billion purchase of
Dentyne, and is expected to realize over $640 million in cost savings through 2007.
Press releases have also indicated that Cadbury plans to utilize a significant amount of
these savings to strengthen marketing and new product development.
Student
Managed
Fund
Stock Research Report
By Todd Shrier and Philip Odackal
Recent News
Dow Jones Business News
Cadbury Schweppes Plans Job Cuts, Factory Closures
Monday October 27, 3:40 am ET
A Wall Street Journal Online News Roundup
LONDON -- Cadbury Schweppes PLC (NYSE:CSG - News) , the world's third-largest
soft-drink producer and a leading maker of sweets, said Monday it plans to cut 10% of its
55,000-strong global work force.
The company also said it plans to close some 20% of the 133 factories it operates worldwide.
Cadbury, which reported flat first-half earnings in June because of poor market
conditions, said it expected the moves to yield savings of 400 million pounds ($678.2
million or 575.1 million euros) a year by 2007.
The moves are part of a four-year plan for cutting costs and driving growth that Cadbury
will embark on after admitting its cost base was "out of line."
In addition to its flagship brand Dr Pepper, London-based Cadbury makes 7 UP, Mott's,
Snapple and other beverages. Overall, Cadbury has a 16.6% share of the U.S. soft drink
market, behind Coca-Cola and PepsiCo. The U.S. soft-drinks business accounts for about
25% of Cadbury's operating profits.
Earlier this year, Cadbury announced it was consolidating its North American beverage
business to cut costs and to improve its relationship with bottlers and retailers.
LONDON MARKETS
London stocks edge higher
Cadbury among top gainers on broker upgrade
By Emily Church & Steve Goldstein
Last Update: 12:26 PM ET Oct. 17, 2003
LONDON (CBS.MW) - London stocks held onto gains on Friday behind defensive
stocks, able to thwart the market downturn in the U.S. and Europe.
The FTSE 100 index (UK:1805550: news, chart, profile) rose 0.1 percent to 4,344.,
while French and German markets declined. See story on European markets.
U.S. stock markets dropped in a tech stock-led decline, with Sun Microsystems and
Student
Managed
Fund
Stock Research Report
By Todd Shrier and Philip Odackal
online auction house Ebay lower after giving a weaker 2004 projection than hoped. See
story on U.S. markets.
The U.S. losses did not impact London markets as much due to the dearth of tech
exposure to the benchmark FTSE 100 index.
Cadbury Schweppes (CSG: news, chart, profile) (UK:CBRY: news, chart, profile), the
food and beverage maker, rose 4.3 percent and was among the biggest gainers in
London. The stock was upgraded Friday by Goldman Sachs to outperform, which told
clients it sees a potential 24 percent rise in share price over the next 12 months if it hits
its targets.
It said confectionery operations productivity is 45 percent below its peer group average,
and new management "appears well placed to reduce costs and invest in better growth."
Integration of its Adams unit should also provide lift to the shares, the broker said.
Press Release
Source: Cadbury Schweppes PLC
Cadbury Schweppes in Successful $2BN Bond Issue
Tuesday September 30, 12:14 pm ET
LONDON, Sept. 30 /PRNewswire-FirstCall/ -- Cadbury Schweppes is pleased to
announce that it has successfully completed the company's first bond issue in the US
market, raising $2 billion, ahead of the company's $1 billion - $1.5 billion target. The size
of the issue was increased in response to strong investor demand.
The proceeds will be used to replace some of the financing arrangements put in place in
December 2002 to fund the $4.2 billion acquisition of Adams confectionery business
(which includes such major brands as Halls, Trident, Dentyne and Bubbas Bubblegum
range). Cadbury Schweppes' brands (particularly Dr Pepper, 7 UP, Mott's, Snapple plus
the Adams range) are well known in the US market.
The bonds are split evenly between 5-year and 10-year maturities, with margins over the
relevant US Treasuries of 80bps and 95bps respectively. After costs, this represents an
average cost of funds of approximately 4.6% per annum. Proceeds from the sale were
received on 29 September 2003.
The lead arrangers were Bank of America, Deutsche and JP Morgan.
David Kappler, CFO of Cadbury Schweppes said: "We are very pleased that US bond
investors have recognised the strengths of the company's strategy, portfolio of brands and
cash flow to enable us to raise money at such competitive margins. The relatively low
interest rate environment may present further refinancing opportunities, although we do
not envisage tapping this US Market again in the foreseeable future."
Student
Managed
Fund
Stock Research Report
By Todd Shrier and Philip Odackal
Risk Factors
The first risk factor confronting CSG’s management team is the distribution chain
of the U.S. beverage market. Over the years, CSG has had to rely heavily on bottlers
owned by Pepsi and Coke due primarily to their superior breadth of coverage. Such a
trend has continued throughout 2003 and it is believed that new brand offerings by Pepsi
and Coke, such as Pepsi Vanilla, have taken priority of CSG’s leading brand Dr. Pepper,
for distribution. CSG must attempt to negotiate an agreement that would allow
distribution of its core brands regardless of the product offerings of both Coke and Pepsi.
The second risk factor centers on the implications of substantial debt holdings. Valueline
reports CSG possesses 6.2 billion dollars worth of long-term debt against only 9.02
billion in sales. Such a high proportion of debt translates into diminished managerial
flexibility in the years to come. Although much of the debt is due to their recent
acquisition spree (Adams and Dentyne), this is a situation that will have to be monitored
in the upcoming years. The third risk factor relates to globalization. Pepsi and Coke
have already entered and grasped significant market share in emerging markets around
the world. Over the next ten years, CSG will be challenged to compete on a similar basis.
Furthermore, with the saturation of soft drink consumption in the U.S. market, Pepsi and
Coke have looked to non-carbonated beverages as a solution to stagnant growth. CSG
will once again be challenged to stimulate growth by fortifying their non-carbonated
product line beyond Snapple and Hawaiian Punch.
Models
1. Earnings Yield
-2003 EPS: $2.07
-Current price: $25.99
-Current yield: 7.96%
-Projected sales growth rate: 6.5%
Result: Buy
*Nearly an 8% current yield provides a significant gap against the longbond over the next ten years even if CSG was to under-perform its
earnings estimates and the long-bond approaches its historical average of
6%.
2. Valueline:
-Return on total capital: 10%
-Sales: 6.5%
-P/E: 20
-Dividend yield: 2.9%
-Ten-year future value: $92.93
-Buy price: $29.66 for 15% return
-Current price: $25.99
Student
Managed
Fund
Stock Research Report
By Todd Shrier and Philip Odackal
Result: Potential Buy
*Sales estimates and return on total capital estimates used in this model
were conservative (6.5% against projected 7.5%; 10% against projected
11%).
3. Valuepro:
-Growth Rate: 6.5%
-Risk Free Rate: 6%
-Beta: 1
-WACC: 8.37
-Intrinsic Value: $22.91
Result: Observe
*Intrinsic value slightly under current price of $25.99
Trade Details
Stock Name: Cadbury Schweppes PLC
Ticker: CSG
Presentation Date: November 9, 2003
Covering Managers: Todd Shrier & Philip Odackal
Vote: For: 7; Against: 1; Absent: 3
Decision: Buy
Current Price: $25.99
Number of Shares: 578
Cash Value: $15,022.22
Stop Loss Limit: $22.09 (15%)
Appreciation Review Target: 31.18 (20%)
Anticipated Date of Trade: November 13, 2003
Trade Executed by: Professor Chinmoy Ghosh