Overall, Cadbury's solid results through the first six months of 2009 indicate to us that the firm is beginning to realise some early benefits from its cost-saving initiatives. We don't anticipate making any major changes to our fair value estimate for one of the world's leading confectionery firms, however, as these results are tracking in line with our full-year expectations.
Sales through the first six months of 2009 grew 13% compared with the same period a year ago, but only 4% when excluding foreign currency movements. We were once again impressed by the strength in the firm's emerging and developing markets (nearly 40% of the firm's sales base), as sales were up 7% year over year; however, this lags the double-digit growth the region had been generating. In our opinion, Cadbury's growth could come under pressure in the second half of the year, as consumers continue to rein in their spending, particularly in its more mature markets of the United States and United Kingdom.
In addition, we were encouraged that Cadbury's efforts to trim more fat from its cost structure by simplifying its manufacturing efforts, reducing stock-keeping units, and centralising its European supply chain seem to be gaining traction, as the underlying operating margin expanded by 140 basis points to 11.1%. That said, elevated input costs (namely higher cocoa prices) are continuing to weigh on the gross margin, a situation we don't expect to abate over the near term. Further, it is still unclear, in our opinion, whether Cadbury will achieve the significant margin improvements it is forecasting, as near-term hurdles could extend the time frame over which these results are realised beyond our initial forecast of 2013.
Despite the head winds with which Cadbury must contend, we believe its leading market position in the attractive confectionery industry will enable the firm to generate solid cash flows over the longer term.
Erin Swanson, CFA is a Morningstar stock analyst based in the United States.
