This Is a Sweet Investment
Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Hershey’s (NYSE: HSY) stock has appreciated approximately 120% over the past three years. However, this should have been expected considering the broader market’s bull run. The question now is whether or not Hershey is capable of continuing to reward investors going forward.
Not swimming naked
Though Hershey is similar to most stocks throughout the broader market over the past years in the fact that it has handsomely rewarded investors, it’s dissimilar to many of those companies because Hershey’s underlying fundamentals are actually impressive. When the market is in manic bull mode, the tide is so strong that it picks up the garbage along the way. As Warren Buffett so aptly put it, not until the tide goes out do we get to see who’s swimming naked.
Many people don’t understand this phrase, but it simply means that companies with weak underlying fundamentals will be revealed when the market heads south. You can figure out which companies fit into this category prior to the tide going out by doing research. In this case, the research has been done for you, and Hershey is definitely not swimming naked.
Hershey owns 43% market share of the chocolate market, and it doesn’t look as though any competitors will be treading on that territory anytime soon. Hershey has also increased its market share in gum and mints. And innovations such as Kit Kat Minis, Twizzler Bites, and Jolly Rancher Bites have helped boost sales.
Hershey has increased advertising and promotions, which has paid off. Not only did Hershey witness core brand growth in the second quarter, but it’s international expansion efforts seem to be effective. As if that’s not enough good news, costs have declined.
Hershey has consistently improved its top and bottom lines annually, and that trend is likely to continue. Hershey recently upped its FY2013 adjusted EPS guidance to $3.68-$3.71 from $3.61-$3.65. And net sales are now expected to grow at 7%, versus an earlier expectation of 5%-7%.
If you’re looking for negatives, there are two possibilities. One, Hershey has a debt-to-equity ratio of 1.69, versus an industry average of 0.50. Two, the stock is trading at 30 times earnings, making it more expensive than peers.
Hershey vs. peers
J.M. Smucker (NYSE: SJM) has also consistently improved its top and bottom lines annually. Like Hersey, margins are solid. Unlike Hershey, J.M Smucker has a healthy debt-to-equity ratio of 0.58.
J.M. Smucker has an impressive brand portfolio, including Folgers, Dunkin' Donuts coffee, Hungry Jack, Millstone, and Crisco. Seven of its brands are category leaders in the United States, and eight of its brands are category leaders in Canada.
J.M Smucker might not be as large as Hershey, but it’s a highly strategic company with stellar management and a very strong company culture. According to Glassdoor.com, employees have rated their employer a 4.0 of 5 (very high/rarely seen), and 92% of employees would recommend the company to a friend. Perhaps, even more impressive is that 96% of employees approve of CEO Tim Smucker.
Mondelez International (NASDAQ: MDLZ) also has a strong brand portfolio, including Oreo, Nabisco, Trident, and Tang. Mondelez owns nine brands with annual sales of over $1 billion. The company’s market share in different categories is impressive, as evidenced below:
- Chocolate: 15%
- Gum: 3%
- Candy: 7%
- Biscuit: 18%
- Powdered Beverage: 16%
Nelson Peltz wants PepsiCo to purchase Mondelez. This news has led to some excitement for Mondelez. However, Pepsi has clearly stated that it’s not interested. On the other hand, this shouldn’t act as a downside catalyst for Mondelez's stock price. Mondelez is a strong company with broad geographic exposure, as its brands are marketed in 165 countries.
If you’re looking for dividends, then Hershey, J.M. Smucker, and Mondelez are all good options. They currently yield 1.80%, 2.10%, and 1.60%, respectively.
This isn’t about one company being better than the other. All three should present quality long-term investments. Based on historical stock performances, we know that Hershey and J.M. Smucker are relatively resilient in bear markets, but we don’t know how Mondelez would perform in such an environment since it’s a different company after spinning off Kraft.
As far as Hershey goes, underlying fundamentals are strong, innovation is impressive, costs have declined, and guidance has improved. These factors often lead to stock appreciation. If the stock suffers due to a steep market correction, it will present an opportunity to buy more.
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