The Investment Column: Cadbury's only a hold as US competition bites into margins

Investors can get fat on fast growing La Tasca; Tool hire group Ashtead goes higher and higher
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The Independent Online

It has been a good centenary year for Cadbury Schweppes, the food and drink giant. The company is on course to deliver its strongest sales growth for a decade after revitalising its Dairy Milk and other brands. That's not bad for the confectionary group, which grew from a one-man business set up in 1824 by a young Quaker, John Cadbury, into a group that is now worth more than £11bn.

Cadbury, which also stands behind Trident gum and Dr Pepper drinks, indicated yesterday that it is on course to deliver sales growth of 5.7 per cent this year. The group is in the process of selling off its European soft drinks arm to the private equity groups Blackstone Group and Lion Capital for €1.85bn, leaving it focused on its core chocolate-to-chewing gum operations and its US fizzy drinks business. Once the deal is complete early next year, about two-thirds of sales will come from its chocolate and sweets brands. Cadbury intends to use the proceeds to cut its £4.3bn debt pile and maybe on small acquisitions. For example, it is in talks to acquire the part of the Turkish confectionary business Kent it does not already own for £55m.

Under its chief executive Todd Stitzer, the group has decided that investing in its brands is key to future growth. The company is building a new chewing gum factory in Poland for £70m and investing £30m in a gum facility in Mexico which will expand production of sugar-free gum.

But it is not all rosy at Cadbury. Its US drinks business is facing stiff competition from Coca-Cola and Pepsi. Also, despite a cost-cutting programme, margins have suffered across the group due to events outside its control, leaving it unable to meet its profit margin target this year. Oil price increases and hurricane-related disruptions have caused higher transport costs; the collapse of a key supplier to Cadbury's Snapple drinks business has led to a sharp rise in the cost of glass bottles. With its shares trading at 16 times earnings, Cadbury is at best a hold for now.

Investors can get fat on fast growing La Tasca

We live in a cash-rich, time-poor generation and the Spanish restaurant chain La Tasca is looking to profit from this trend. For the price of a Marks & Spencer ready meal, the group offers customers a freshly cooked dinner without having to worry about doing the washing up. Business is booming at its restaurants - branded as La Tasca and the more upmarket La Vina. Yesterday's interim results - pre-tax profits soared 92 per cent to £2.7m - easily beat City forecasts.

It's been less than a year since the group's float and La Tasca has already started to generate serious cash. Not only is it able to fully fund its roll-out programme from the cash its existing restaurants bring in but it has enough spare to pay investors a maiden interim dividend of 0.37p a share. Six new sites have opened in the first half, taking the total estate size to 56. A further eight are scheduled to open in the second half.

Brokers raised profit forecasts for the second time since the IPO and it may not be the last time. But the stock still trades at just 15 times next year's earnings. For a fast growing company like La Tasca, that is not expensive. Buy.

Tool hire group Ashtead goes higher and higher

If readers had bought £100 worth of shares in Ashtead on 13 March 2003, their stake would now be worth just under £6,000. To put it mildly, the tool hire group's performance over the past two-and-a-half years has been impressive and forecast-busting second-quarter results from the company yesterday extended the winning run for the stock. Ashtead unveiled a pre-tax profit of £27.9m, nearly double that predicted.

Admittedly it would have been an ultra-brave investor who bought into the group in March 2003. In those days it looked to be heading for administration amid tough trading conditions and problems servicing its debt. But those times are long gone. Ashtead is now back on the dividend list, promising to pay investors an interim 0.5p a share.

The key to Ashtead's success has been the US construction boom. The tool hire group generates 83 per cent of its profits from across the Atlantic, where demand for its services has been boosted by the massive clean-up operation after this year's extreme hurricane season.

The consensus among brokers in the Square Mile is that Ashtead shares have further to run. And they are probably right, making the stock a hold. But anyone who bought into Ashtead two-and-a-half years ago would do well to take some of their chips off the table.

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