While investors shouldn't blindly apply comparative analyses to make buy and/or sell decisions, examining how the market treats the relative performance of similar companies in similar industies can be useful data. In the case of Cadbury-Schweppes, such an analysis may point us away from this company as an investment for now, as hard-charging PepsiCo has it beat on several counts.

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By Dave Marino-Nachison (TMF Braden)
June 6, 2001

Say, did you hear that U.K.-based soda, juice, and candy company Cadbury-Schweppes (NYSE: CSG) is close to buying up Organogenesis (NYSE: ORG) and Yahoo! (Nasdaq: YHOO)? Huh? What's that? It's Orangina and Yoo-Hoo? Well, that makes a little more sense.

OK, a lot more sense: The company said today in a press release that discussions with Pernod Ricard to buy the Orangina, Pampryl, Champomy, and Yoo-Hoo brands in the North America, Continental Europe, and Australia markets for 700 million euros -- approximately $600 million -- are nearing completion. (Pernod Ricard retains the rights to the brands elsewhere in the world, but that amounts to only a small percentage of its soft drink sales.)

Such a deal would seem to make Cadbury-Schweppes, already strong in Europe, even stronger both there -- especially in France, where it would expand its product portfolio considerably -- and in the U.S., where Orangina and Yoo-Hoo are well-established and good complements to its Dr. Pepper, 7-Up, and Snapple lines.

But does the deal make it a hidden bargain in the soft drink sector? Based on a quick glance at its current price/earnings, price/sales, and price/free cash flow numbers compared with global soda giants PepsiCo (NYSE: PEP) and Coca-Cola (NYSE: KO), perhaps not.

Company     P/E   P/S   Price/FCF
---------------------------------                                  
C-S          25     2          14
Coca-Cola    38     6          31
PepsiCo      29     3          21
*Numbers for trailing 12 months. Source: MarketGuide.

This very cursory quantitative comparison ignores several important factors, among them the different target markets, product mixes, and growth prospects of each company. Cadbury-Schweppes, for example, has a very strong presence overseas and has a global market for its sweets, which made up just less than half of 2000 sales; PepsiCo targets U.S. domination in salty snacks and non-cola drinks; and Coca-Cola is, well, Coca-Cola.

But while investors shouldn't blindly apply comparative analyses to make buy and/or sell decisions, examining how the market treats the relative performance of similar companies can be useful data. In this case, PepsiCo -- as noted in a recent Dueling Fools by Rick Aristotle Munarriz -- behaves like a Rule Maker but commands a significantly better price.

That's not something Cadbury-Schweppes -- which trails both PepsiCo and Coca-Cola by a significant degree in terms of its ability to generate revenues and earnings before interest, taxes, depreciation and amortization (so-called "EBITDA" is often used as a proxy for operating cash flow) -- can say today. The company's slight trading discount relative to its peers may be too slight.

Dave Marino-Nachison loves the Cadbury Bunny like a brother. His stock holdings can be viewed online, as can The Motley Fool's disclosure policy.

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