Bottom Line: Sweet success

CADBURY Schweppes must be wondering what it has to do to impress the City. In the first half of the year it increased pre-tax profits 23 per cent, margins by a fifth, earnings by a tenth and the dividend by 28 per cent (admittedly partly to change the balance between interim and final payments). Yet its shares were marked down by 4p to 468p, putting it at a yet bigger discount to the rest of the market.

A pounds 3m drop in sales from its beverages business, despite a maiden contribution from A&W brands, did vindicate the bears who expected price competition and own-label launches such as J Sainsbury's Classic Cola to start hurting.

Cadbury's riposte was equally dramatic. In Britain it trimmed pounds 11m from overhead costs, which kept both margins and profits moving ahead despite a 3.7 per cent fall in sales. That was repeated elsewhere and underlying beverage profits were up about 6 per cent after adjusting for last year's Spanish restructuring and the A&W contribution.

The long hot summer means the soft drinks division has had a bumper start to the first half - in Britain it has turned the 2 per cent first-half rise into a 12 per cent increase. Forecasts of about pounds 480m, for earnings of 32.8p, should be achievable, putting the shares on a prospective multiple of 14, a 5 per cent discount.

The scale of the margin improvement in the first half makes it inevitable that the City will wonder what it can do for an encore. Its record of producing above-average earnings growth means such doubts should be ignored.