JPMorgan has downgraded shares at Cadbury Schweppes from neutral to underweight this morning (24 July), following the damage done to Cadbury’s reputation by the salmonella scare which resulted in the recall of 1m chocolate products.
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In a note to investors, JPMorgan warned of the risk of an earnings downgrade as a result of the cost of the product recall, predicting an update on this issue on 2 August.
The market analysts also said negative publicity was likely to continue due to the heightened risk of legal action against the world’s largest confectioner and the possibility of an extension to the product recall.
JPMorgan predicted that UK confectionary sales will decline by 8% in H2 of 2006 and 2% in H1 2007. The investment advisor said that it anticipates that Cadbury will return to growth in the second half of 2007.
The research note suggested that the salmonella scare could cost the chocolate maker GBP30m (US$55.55m) in the second half of this year and GBP8m in the first half of next year. JPMorgan cut its EPS guidance by 3.8% in 2006, 4.8% in 2007 and 4.4% in 2008. It also cut its 12-month price target to 540 pence.
Nonetheless, Cadbury shares have performed solidly today – increasing by 0.48% to 520.50pence at time of press.
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