Life is pretty sweet for confectioner Cadbury (NYSE: CBY) without its North American drinking buddy Dr. Pepper Snapple (NYSE: DPS).
The candy maker reported first half net profits fell 38% after it spun off its soft drink division earlier this year, not surprising when the segment -- which included popular brands 7-Up, Snapple, Dr. Pepper, and Hawaiian Punch -- comprised 36% of 2007 revenues and 48% of its operating profit. Yet if you look at the operations that remain, pre-tax earnings actually rose 12% on a 7% increase in revenues. Sweet!
Cadbury, which will fall to the No. 2 spot on the list of World's Biggest Confectioners when Mars completes its acquisition of Wrigley (NYSE: WWY) later this year, also soured a bit on rising commodities costs like coco, which rose 37% in the first half, but much of those expenses were able to be passed along to consumers.
What may hurt Cadbury most though are the dimming chances of a major combination with Hershey (NYSE: HSY), Berkshire Hathaway (NYSE: BRK-B), or even Kraft (NYSE: KFT). Chairman Roger Carr was emphatic that Cadbury will "not contemplate acquisitions that do not create value," but if it wants to maintain its preeminent position throughout the world -- the candy maker is No. 1 in dozens of markets -- it may have to consider someone as a partner.
Cadbury is the No.1 company in the global confectionary market, with a 10.1% market share. It's got the end cap of the candy aisle with a 7.4% share and is second only to Wrigley in gum. Yet in chocolate, it sorely lags behind Nestle (OTC: NSRGY), Hershey, and Kraft. That's where the oft-rumored, but never consummated merger with Hershey could make an impact, providing complementary products and expanding market share, giving them some 30% of the North American chocoholics.
If it wants to still make a "value creating" combination, then privately held Lindt & Sprungli is one possibility which would grant Cadbury a foothold in the premium chocolate market. Italian confectioner Ferrero would usher it in to Latin America, where Cadbury currently has top share in gum but a less than 1% share in chocolate.
Although the growth story looks good in all its sugary glory, Cadbury's valuation is just as rich. At 21 times fiscal year 2009 earnings, the candy maker is far more expensive than the 14 and 15 forward P/E for Nestle and Kraft, respectively. It also commands a slight premium over Hershey. Only Wrigley's is higher, but considering the premium Mars has offered, that's not unexpected.
I just hope Cadbury doesn't wait so long that what it has to offer becomes as stale as last Easter's candy.
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