Sweet start for Cadbury in 1Q

Cadbury's first quarter represents a decent start to the year, but key is whether it will achieve its targeted margin improvements

Erin Swanson, CFA | 01-05-09 | E-mail Article

Even though we don't foresee any major changes to our fair value estimate for Cadbury after the firm provided its first-quarter sales update, we plan to revisit our model to ensure that our valuation appropriately reflects the challenging global environment.

Sales increased 11% from the same period a year ago, but grew only 2% when excluding foreign currency movements. Emerging and developing markets continued to be a bright spot for the firm, as sales were up 6%; however, this lags the double-digit growth the region had been generating. In our opinion, the economic weakness in its more mature markets (namely the United States and the United Kingdom), as well as the effect that slowing economic growth in the Western world may have on emerging and developing markets, is presenting some stern challenges for the firm. While the firm is contending with deteriorating global economic conditions and erratic foreign currency rates, the biggest obstacle for Cadbury, in our eyes, is whether it will achieve the significant margin improvements management is forecasting from its current restructuring initiatives.

Subsequent to the end of the first quarter, Cadbury completed the sale of its Australian beverage segment to Asahi Breweries for net proceeds of £475 million. We are encouraged that the firm intends to use the proceeds from this sale to repay a portion of its debt that matures in June. Further, we believe that the separation of Cadbury's last remaining beverage operation is a modest positive, as this should enable the firm to exclusively focus on its confectionery operations.

Erin Swanson is a stock analyst with Morningstar.com.

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