In the past year, Cadbury has spun off or sold all its beverage businesses, leaving a “pure play” candy, chocolate, and gum company behind. The company manages an assortment of brands, the most notable are Halls, Dentyne, Trident, Stride, and Cadbury. While sweets are popular worldwide, interestingly, leading candies or gums in one market may not have a presence at all in another country. For example, Cadbury leads the gum markets in France and Turkey, but trails Wrigley by a “country mile” in Germany. Cadbury leads the chocolate market in Britain and Australia, but trails Mars and Hershey (who distributes Cadbury chocolate in the U.S.) by a longshot in the U.S.
Still, Cadbury’s revenue profile is fairly typical of a successful global business, with significant revenue streams coming in from every continent. This is one advantage for investors seeking global exposure. Another is that these types of products can survive even harsh economies. A serving of gum costs a few cents, and even medium-tier chocolate is affordable to a significant chunk of world population.
Cadbury’s profitability and ROIC has been fairly soft, which is why the stock trades at a low multiple to sales (around 1.2X). Contrast this to the outrageous 4X revenue that Mars paid to acquire Wrigley, or even the 2X revenue that Cadbury paid Pfizer to acquire the gum business in 2003. Even Hershey or the absurdly-mentioned-as-takeover-fodder Tootsie Roll Industries trade at significantly higher price to sales multiples.
Why is Cadbury so cheap then? First, by the company’s own calculations, ROIC recently came in at 8%, which isn’t going to get anyone excited. Second, the British pound has been hammered, along with British stocks, sending the value of the ADR down. Finally, investors have likely been upset with some of Cadbury’s recent pricing decisions, that may have cost share in some European chocolate markets.
In any case, the stock is unpopular and restructuring charges, along with the soft drink spinoffs and the bear market, have masked an evolving, positive profit trend in Cadbury’s underlying business. If the company can meet its 2011 operating margin goals in the mid-teens, and grow a bit along the way, it could be making around $1B/year in a few years. With a market cap of $10 billion, and $8 billion in revenue, it doesn’t take much imagination to come up with a potential market price much higher than the current $29. I wouldn’t argue Cadbury will ever command 4X revenue, but even at Hershey’s current 1.66X revenue, with another 3 years of modest mid-single digit growth, the stock could fetch $45-50. And this says virtually nothing about Cadbury’s emerging markets growth potential, which Hershey really doesn’t have. In the meantime holders of the stock make a decent 3%+ dividend and own a pretty safe business.
After all, it could be argued that gum or candy is the world’s cheapest discretionary product. A lot of other businesses will fold before people stop chewing gum or popping in a little sugar fix. A safe business with upside, and low blowup risk seems pretty good to me. I’m long CBY at $29.