Isn't it appropriate that Cadbury Schweppes (NYSE: CSG) reported earnings on National Junk Food Day? Well, with a Dr. Pepper in hand and no eclairs to be found, let's look at the numbers.
Sales were up 9%. Earnings were up 2% (if you ignore restructuring charges). So, simply put, the soft drink and confectionary giant's earnings schlepped through another quarter.
One positive note was that Adams chewing gum, the $4.2 billion acquisition from Pfizer (NYSE: PFE), experienced strong growth and added to earnings.
Key to earnings is the Fuel for Growth program, which is designed to remove 400 million pounds in expenses a year. That's a lot of weight, even for a junk food company. But those are British pounds -- as in currency. (Since Cadbury is based in London, does that mean my Dr. Pepper has water from the Thames?)
In the first 24 weeks of this fiscal year, Cadbury had an operating profit of 448 million pounds. So, the Fuel for Growth program, if successful, will greatly improve profitability. That probably explains why in March, when Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) announced it was reducing or eliminating so many stock positions, it was buying Cadbury.
Warren was happier yesterday when the stock was within a whisker of its 52-week high. Investors don't like schlepping -- especially for a stock selling at 25 times earnings. Looks like investors used today's news to sell, though, with the stock down by 5.5%.
Cadbury, at 25 times earnings, sells for a similar price to earnings as competitors Coca-Cola (NYSE: KO), PepsiCo (NYSE: PEP), and Hershey Foods (NYSE: HSY). Cash-rich and debt-free Wm. Wrigley Jr. (NYSE: WWY) sells for a premium 30 times earnings.
Cadbury, with 14% operating margins, trails its competitors -- especially Coca-Cola with its group-leading 29% margins. It is Cadbury's strong brands and the expectation that it can expand its margins to at least match peer levels that keep the stock price selling at what looks like a premium multiple. There is also a 1.8% dividend for investors while they wait.
Interested in dividends? Why not try a free trial to the Motley Fool Income Investor?
Fool contributor W.D. Crotty owns stock in Berkshire Hathaway and PepsiCo.
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