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Qualiport

How many brands do you know?

Portfolio Update

Today we move on to our third and final contestant in the Qualiport branded consumer products competition. We're hoping that one of these three companies will be good enough to make it into our market beating portfolio. To check out the details of the other two companies, Unilever and Reckitt & Colman, click here to go to the archive.

Cadbury Schweppes is a global company employing over 41,000 people. They are principally engaged in the manufacture and sale of branded beverages and confectionery. Their Chairman is Sir Dominic Cadbury. He is the only Cadbury on the board, owns 696,000 shares in the company, and has share options on another 386,000 at an average price of 444p.

The Cadbury Schweppes 1997 annual report begins with:

"Cadbury Schweppes' governing objective is growth in Shareholder value. We will deliver this by competing in growth markets, with strong brands, focused innovation and value enhancing acquisitions. Our organisation is increasingly energised to manage for value."

Underpinning that opening statement is their strategy, which is based on:

• global representation in the two growth markets of beverages and confectionery
• concentrate on building strong brands which earn high margins and generate substantial cash flows
• growing volume and market share by innovation in products, packaging and route to market.

In April 1997, the company introduced an initiative called "Managing For Value" which underpins their overriding objective to increase shareholder value. They use the principles and techniques of Value Based Management, which involves various things, from financial performance to greater accountability to aligning the financial rewards of management with those of shareholders. As a first step, the company went public with a couple of important objectives:

• to double shareholder value within the next five years. The base starting point was the end of 1996, when the share price was 493p. With the shares now hovering around the 927p mark, they've almost achieved their aim already. A pity Fool UK didn't exist back at the beginning of 1997! The reported normalised earnings growth hasn't been anything to write home about, so the share price appreciation has been almost exclusively down to an expansion of the price to earnings (P/E) multiple. Whereas they traded on an average P/E of 14 between 1994 and the end of 1996, they now trade at a P/E of 24.
• to consistently deliver double digit earnings per share (EPS). We'll come back to this one, but in 1997 they claim they achieved this aim because their underlying EPS growth excluding the effects of strong sterling rose by 16%.
• to generate free cash flow in excess of £150m per annum. In 1997, the company says free cash flow was £157m.

I like it when companies make public their aim. It focuses the company and gives shareholders a benchmark from which to judge their performance. It also can potentially help when valuing a company, as predictability of earnings removes much of the uncertainty. That reminds me of a Warren Buffett quote, "It is better to be certain of a good result than hopeful of a great one." Rentokil Initial publicly state their aim of increasing sales and EPS by 20% every year. I think Zeneca also have a public aim to grow by 15% every year. Anyone who can confirm or deny that, please email me.

Cadbury Schweppes stresses that these are not financial forecasts, but they represent performance goals. If I was a shareholder, I'd be hoping that they were going to revise their shareholder value and free cash flow goal on a regular basis, probably annually.

Brands

Beverages
Dr Pepper, 7-Up, Schweppes, Crush, Oasis, Squirt, Canada Dry, Solo and Sunkist. Total 1997 sales of beverages were £2 billion.

Confectionery
Cadbury's Dairy Milk, Time Out, Cadbury's Roses, Fuse, Twirl, Cadbury's Milk Tray, Cadbury Mini Rolls, Maynards Wine Gums, Crunchie, Flake, Picnic, Yowie, Creme Egg. Total 1997 sales of confectionery were £2.2 billion.

Cadbury Schweppes Snapshot

Recent Share Price: 927p
Market Capitalisation: £9.4 billion
1997 Sales: £4.2 billion
Price-to-sales (PSR) ratio: 2.2

1997 Normal EPS: 39.2p
1998 EPS estimate: 40.5p
1999 EPS: 44.6p

1997 Price Earnings Ratio: 23.7
1998 Estimated P/E: 22.9
1999 Estimated P/E: 20.8

Next Week

Next Wednesday we'll get a bit more familiar with the Cadbury Schweppes' numbers. Just on this brief look today, a few questions pop into my mind. Should we be investing in the number two of any business? Coca-Cola are the acknowledged world leader in beverages, and companies such as Nestle lead the confectionery markets. Investing is like big ticket shopping. You normally save money in the long run if you spend a bit more up front to buy the best product on the market -- washing machines spring to mind. Yet, does Cadbury's lack of market leadership present them with opportunities to grab that number one mantle? Then again, Cadbury are market leaders in many of their individual product lines.

For those who want to do a bit of extra research into Cadbury Schweppes, the 1997 annual report is worth a look. They have a 10-year financial record and financial ratio analysis, which excites sad accountants such as myself. It is interesting to see, for example, that in 1988, the operating margin for beverages was 8.8% and for confectionery it was 11.8%. In 1997, the corresponding numbers were 17.5% and 12.7%. We'll be looking a bit closer at these numbers next week.

Have a good weekend, Fools. Please feel free to express your views about Cadbury Schweppes, or any other potential Qualiport company, on the message boards.

Bruce Jackson (TMF Googly)

Qualiport Numbers

Today's Numbers            Date    12/06/98


          Change     Bid
          pence       £

RTO       -0.07      4.01
EMAP      -0.13     12.80
MKS       -0.08      5.34         


Rec'd     #     Stock     Buy      Now    % Change £ Change

19/12/97 1565  Rentokil   2.55     4.01    57.3%     1.46 
17/04/98  337  EMAP      11.85    12.80     8.0%     0.95 
11/05/98  722  M & S      5.535    5.34    -3.5%    -0.195


19/12/97 1565  Rentokil 4,040.63  6,275.65  55.3%  2,235.02 
17/04/98  337  EMAP     4,043.37  4,313.60   6.7%    270.23
11/05/98  722  M & S    4,052.24  3,855.48  -4.9%   -196.76

Cash                                    33.96

Total                               14,478.69 


                Day    Month    Year    History

Qualiport      -1.4%   -3.0%    48.8%    52.2%
FTSE 100       -1.4%   -1.7%    12.4%    14.9%
FTSE All Share -1.3%   -1.5%    14.5%    16.9%

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