Stock Market Ratios
The stock market ratios for a company are mainly used to assess the company’s stock price in relation to the earnings of the financial year or the overall profits. From Cadbury’s point of view it is also interesting to identify how other companies value the business by giving hostile bids.
Cadbury’s P/E ratio looks very healthy with a slightly decrease from 31.70 in 2007 to 27.04 in
2008. It seems as if investors and shareholders are optimistic about the future of the company’s business after a good financial year 2008 of the company and optimistic predictions for 2009 operations.
When looking at Kraft Foods offer to take over Cadbury, we can see that this offer values
Cadbury at a P/E ratio of around 17.0. This is one reason why Cadbury has rejected the first hostile bid as it undervalues the estimation of its own future business success. This is also reflected by Cadbury’s Q3 2009 outlook that predicts a 7% rise in revenue and its operating margin to jump 135 basis points rather than the former target of 80 basis points.
When looking at dividends we can see that the dividend cover increased from 1.25 in 2007 to
1.38 in 2008. A slight increase but still a conservative level of paying out dividends compared to the company’s profits.
It is more interesting to look at the average dividend growth rate of 8.7% and that dividends now grew for the last 11 years with a stable dividend yield of 2.68% in 2008. It shows that Cadbury is able to operate successfully even without a strategic partner or as a part of a bigger company such as Kraft. Cadbury shareholders might see this and fear if these dividend growth rates can be paid out under Kraft ownership.
Peer Competitors Analysis
In our peer competitor analysis, we’ll try to find out what are the strengths and weaknesses of Cadbury’s by comparing it to Kraft Foods and Hershey’s, two of its main peer competitors. All the data used was taken from the 2008 financial reports (See appendix 1).
We’ll try to concentrate on ratio that are both significantly different from company to company, and that could have an influence on the decision of the buyout.
Our previous analysis showed us that Cadbury’s seems to be, on many ground, a very solid and
promising company; we would now like to show that it is also in a good position, in accounting terms at least, in the market.
The first ratio we’d like to comment is the Capital Gearing ratio. As you could observe on the
data, it’s about the same as Kraft’s and a half of Hershey’s. As explained in the previous part of our work, this ratio shows us the leverage in the company’s financial structure. A higher leverage could mean higher profit for the shareholders for two reasons: debt is “cheaper” than equity and the number of issued share is smaller. On the other hand, lower debt levels are a sign of stability and health in a company. We can see that there is a trade off, but Cadburys seems to be in line with the other competitor, Hershey’s being abnormally relying highly on debt.
The second ratio we would like to analyze is the gross profit margin ratio. On this specific point, Cadbury’s seems to be particularly better than the other companies. This could be for two reasons: they keep their costs low, or they manage to sell products for a higher price. The company has been through multiple cost reduction processes during the past years, and is still working on getting them even lower (source: Morningstar.co.uk).
The third ratio that came to our attention is the profit margin ratio. The difference in the table might not seem so high, but Cadbury’s profit margin in 32% higher than Kraft’s and 22% higher than Hershey’s. This actually means that they manage to create relatively more value out of their sales than their competitor. This indicator is very important as it is a sign of healthy management and usually comes along with relatively good shareholder returns. Even though these numbers seem quite low compared to other industries, we must bear in mind that the food industry usually has very low profit margins, Cadbury’s being on the higher end.
Another concern of Cadbury’s can be explored through the ratio analysis: Inventories (Appendix
3). The stock ratio tells us how many days are necessary, at the normal selling rate, to get rid of the stocks. Compared to the 50 and 65 days necessary for Kraft and Hershey’s, Cadbury’s scores a shameful 98 days. This phenomenon can partially be explained by the acquisition of Adams in 2003, but should be cleared by now. It’s in Cadbury’s plans to get rid of some of the stock-keeping units, and analysts are hoping that this issue could be solved by 2011.
The most important ratio to our eyes is the price to earnings ratio. As we can see in the appendix
2, it is much higher than its competitors’. In general terms and more specifically here in our position of Kraft shareholders, we’d rather have a lower P/E ratio, as it means we’ll pay about twice more, relatively to the earnings, for a share of Cadbury’s than for a share of Kraft. This value is clearly over the industry’s average, which is often the case when a company is in position to be bought (which was already the case for the past years).
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