Cadbury's sales update supports our thesis that following Kraft's bid for the confectionery firm, management is likely to be laser-focused on generating further margin improvement in order to ward off an unwanted takeover or to garner a higher bid from other potential suitors. We're maintaining our fair value estimate, as results are tracking in line with our expectations for the year.
While Cadbury reaffirmed its 2009 sales and profit forecast, it raised its long-term sales growth outlook to 5%-7% annually (from 4%-6%) and now expects operating margins to approach 16%-18% by 2013. In our opinion, Cadbury's cost-reduction efforts will yield significant bottom-line benefits, but we expect the firm to generate operating margins of just more than 15% by 2013, up from an adjusted operating margin of around 11% in 2008. The firm's sales update provided only a brief overview with very few details. We will provide a much more in-depth analysis when the firm reports full-year results early next year.
Although Cadbury's board continues to oppose Kraft's offer, this saga is far from over, in our view. Cadbury shareholders have until the beginning of February to vote their shares. To appeal to the confectionery firm's shareholders and ward off other potential bidders, we believe Kraft will have to enhance its bid (which it has to do by the middle of January), either by paying a higher price or by increasing the cash portion of the offer, which currently stands at 40%. Despite management's stance on Kraft's offer, we contend that Cadbury shareholders may eventually be inclined to accept an offer, rather than risk their shares trading down if the confectionery firm is to go it alone.
Erin Swanson is a Morningstar stock analyst.
