Canadian credit rating agency Dominion Bond Rating Service Limited (DBRS) has confirmed that the corporate rating of Cadbury Schweppes is “A” with a Stable trend.
DBRS explained that there are four reasons for this positive outlook. “Results for the next year should remain acceptable, following EBIT’s improvement to over £760m (US$1.07bn) in 2000,” said DBRS, a prediction made on the basis of the company’s “geographic and categorical diversification”. Secondly, DBRS said: “The beverage division should continue to provide the majority of earnings growth, with North American beverages being nearly 50% of total profit.”
The service also noted that Cadbury’s strategy to grow by acquisition is starting to yield benefits and argued “earnings [are] expected to soon rise due to the substantial activity of the past year.” Finally, DBRS believes that because “Cadbury has gradually grown its margins over time […] profitability should remain comparable to peers”.
On the heels of the positive rating, however, DBRS warned that Cadbury is facing four predominant challenges. Margins will be pressured as the worldwide retailing industry continues to consolidate operations. Furthermore, the extensive acquisition activity has cost Cadbury nearly £2bn in the past year, a figure that is weakening the company’s balance sheet, and it is still unsure how long it will take to fully integrate recent acquisitions and raise efficiency levels.
Importantly, Cadbury is finding it difficult to drive organic growth within the mature market in which it operates. Highly branded competition has limited potential for internal growth, especially in the confectionery business.