Hershey Vs. Cadbury

Hershey and Cadbury were the latest two stocks to go head-to-head in Cramer’s weeklong series on how to value stocks. The goal here is to teach viewers how the big money managers make their picks and to find some good plays along the way.

(Read more about this strategy and what Cramer had to say about McDonald’s versus Burger King, Tiffany versus Coach and Coke versus Pepsi.)

As we’ve been saying, a sector accounts for 50% of a stock’s worth. So when using Cramer’s 10-point rating system, a good sector can earn a company as much as five points. In this environment, one where inflation has peaked but the economy has yet to rebound, Hershey and Cadbury’s sector, food and beverage, is perfect. These defensive stocks are just the type money mangers look for during times like these.

Plus, there’s another important factor at work here: Mars’ acquisition of Wrigley at a nice premium. That puts Hershey and Cadbury, the only two pure-play candy companies left, is position to possibly be taken over themselves. So score five points for each.

Then we look at growth. Just last Friday, Aug. 15, Hershey cut its outlook for 2008 and 2009. Cadbury, however, reported an earnings beat for its most recent quarter, said profits for this year were still on track and even noted that sales growth was ahead of company estimates. So a point goes to Cadbury, while Hershey loses a half point. Score: 6-4.5, Cadbury.

Next up, strategy and execution. Cadbury brings is most of its sales from overseas, and recently spun off its North American beverage unit, Dr. Pepper Snapple, to become a candy pure play. Hershey’s largely landlocked here in the U.S., and recently the manager of the Hershey family’s trust, which owns 78% of the company, said they were adamant that ownership not change hands. So much for takeover potential. That’s one point for Cadbury, and minus one for Hershey. Score: 7-3.5, Cadbury.

Hershey does actually win in the dividend category, offering 3.2% to 2.5% for Cadbury. Of course, that’s only because Hershey stock has declined so much. Give ‘em half a point. Score: 7-4, Cadbury.

When it comes to management the scales tip back toward Cadbury. Heshey’s CEO is brand spanking new, and Cramer never invests with a first-year chief executive. Too much room for error, he said. Give a half point to Cadbury here. Score: 7.5-4, Cadbury.

Now we have to take into account raw costs. Cadbury, with its 10.4% global market share is better bargaining position with suppliers compared to Hershey, which has only a 5.1% share. Cadbury also has done a good job of passing on price increases to its customers without losing them. Hershey, on the other hand, lowered its guidance because it expects a recent 10% price increase to cut into profits. A half point goes to Cadbury. Final score: 8-4, Cadbury.

The final step is to compare our rating with the markets. As Cramer said, a price-to-earnings multiple is the only way to compare stocks apple to apples, so to speak. Hershey, despite its apparent underperformance, trades at 20 times next year’s earnings versus 17 for Cadbury. And that’s not even taking into account Cadbury’s higher growth rate. This makes Cadbury, at least for now, the much more likely takeover target.

“Now that Wrigley’s going private,” Cramer said, “I think it’s Cadbury that you want to buy in the candy aisle.”

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