The Investment Column: Cadbury is worth a hold after a strong set of sales figures

Insurance broker JLT looks risky - Disappointments still tripping up Cookson
Click to follow
The Independent Online

The revitalisation of the Dairy Milk brand in this, its centenary year, was one of several success stories in a set of sales figures from Cadbury Schweppes yesterday that one broker described as "terrific". Revenue in the first half of the year was 6 per cent higher, the company's best performance in at least a decade, and not bad at all considering its products are often, unfashionably, quite unhealthy.

Rebranding Cadbury Caramel and introducing Dairy Milk with orange or mint chips was one example of the product innovation behind the success. In the US, a new cherry vanilla Dr Pepper has been a hit. The Trident gum brand, acquired with the £2.6bn purchase of Adams in 2003, has been revitalised, too. The group has also been lucky: Halls throat lozenges were in demand because of a bad winter cold season in the US.

This type of brand investment is just the sort of thing required to keep a group like Cadbury Schweppes from losing its fizz. It comes at a cost, of course, and profit margins in the first half of the year turned out a little lower than many forecasts. In part, this was because of a manufacturing cock-up in the US non-carbonated drinks business. The company insists it will meet its target for margin expansion for the year and the market seemed happy to take that on trust.

Todd Stitzer, chief executive for the past two years, is squaring the circle of greater investment and improved profitability by cutting costs on the manufacturing side of the business - £100m of annual costs will be taken out this year alone, and factories in Brazil, China and the UK (in Manchester) are among the most recent to have closed. That cost-saving programme is on track and Mr Stitzer is building up a track record of expectations met or beaten.

The most obvious threat to this happy state of affairs is from the competitive situation in the US fizzy drinks market. A raft of new Coca-Cola and Pepsi flavours has recently launched and will no doubt be increasingly aggressively marketed, squeezing the Schweppes brands.

For now, though, Cadbury Schweppes looks to be holding its own, with an impressive mix of fizzy, diet and non-carbonated drinks and of chocolate, chews, gum and medicinal sweets. We said buy the shares in February 2004 at 433.5p but now they yield just 2.3 per cent and look a bit expensive for new investors. But they are a solid hold.

Insurance broker JLT looks risky

The insurance market is one of the most viciously cyclical. As the ability to jack up customers' premiums increases, so too does the amount of capital allocated by insurers desperate to chase this profitable business. The 11 September terror attacks - so the industry assured outsiders - would spur demand for insurance that justified the extra capacity and high premiums that prevailed in that period. Not so.

There was a weary tone to the interim statement yesterday from Jardine Lloyd Thompson, a big insurance broker, responsible for finding insurance for companies and reinsurance for insurers wanting to spread their risk.

Ken Carter, the chairman, said: "It was anticipated after 9/11 that insurers would maintain a stable rating environment. But in the event, traditional characteristics of over-capacity have repeated themselves, with intense competition for both renewal and new business." As premiums tumble, so too does the cut taken by JLT. And now insurers are signalling that they will be cutting back the volume of business, too, from next year.

Already JLT's pre-tax profits are down 25 per cent on a year ago, and it is not time to call an end to the downturn. The company's shares were supported yesterday by news that legal troubles at its rival Marsh have helped JLT win lots of new business. But the shares might soon lose their other support, a prospective dividend yield of over 5 per cent, which must be under threat. Sell.

Disappointments still tripping up Cookson

It is a difficult call on Cookson shares. On the one hand you have an impressive chief executive, who has set out a coherent vision for what has often been an incoherent engineering conglomerate. On the other you have debts that are slightly too high, trading results that are slightly disappointing, and an underperforming, non-core division (its precious metals unit) which nobody wanted to buy when it was touted around last year.

The CEO Nick Salmon, who arrived last year, has a solid reputation in the City because of his time at Babcock International, which he turned from an underperforming conglomerate into a focused support-services company. At Cookson, he has swept aside the attempt by his predecessor to turn the company into a one-stop shop for supplies used in the manufacture of electronics. Instead, he is embracing the conglomerate structure, nurturing the ceramics business - which supplies the booming steel industry - and shifting manufacturing to the Far East.

Yesterday's interim figures underscored the setbacks that have pushed the shares below where we tipped them when Mr Salmon arrived. Trading conditions for the electronics division have been tough not only in Europe, but also in North America. There was a surprise £3.9m charge to cover restructuring in the laminates business, after a customer unexpectedly shifted to Asia. And the precious metals division went from bad to worse, with sales collapsing from £151m last year to £118m because of a drop in demand for jewellery from wholesalers in Europe.

Cookson shares fell 8p to 335p. Does that price strike the right balance between the positive strategic vision and negative financial performance at the moment? It would seem the market values Cookson earnings some 20 per cent lower than it would the company's peers, but the key to restoring confidence will be res-uming dividend payments. The hope is that will come next spring, but with the business still failing to generate cash, there could be disappointments. Wait.

Comments