Candy Industry Winners - and Great Opportunities for Your Portfolio
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investing in the world’s long-term sweet tooth seems like a good idea – after all, I impulse-buy candy all the time in the grocery store checkout line - so there should be some good opportunity there. The companies I will be comparing are Mondelez International (NASDAQ: MDLZNASDAQ: MDLZ)), Hershey (NYSE: HSY), Tootsie Roll Industries (NYSE: TR), and Nestle (ADR) (NASDAQOTH: NSRGY). Nestle and Hershey are your best investing bets; if you feel like gambling, Mondelez could pay off nicely (but I'm not going to bite). I see Tootsie primed for short-term losses and anemic growth long term, so I would avoid it.
Emerging markets push
Mondelez has focused on what management terms the “power brands,” which are market-leading moneymakers like Oreo, Chips Ahoy!, Triscuit, and Cadbury. Mondelez reported strong Q1 revenue growth of 9.3% in emerging markets, including over 9% revenue expansion in the BRIC countries (and China was up over 20%).
Overall, organic revenue grew about 3.8%. That top-line revenue is a little weak (and reflects both volume and market share declines in gum in Europe and North America), but the macro-environment (including low coffee prices) and supply chain issues were significant factors. Fortunately, revenue growth is currently driven primarily by sales volume, as opposed to pricing, which indicates that Mondelez is doing a good job of expansion in its emerging markets.
Earnings per share (EPS) declined compared to Q1 of 2012, clocking in at $0.32 for the quarter (compared to $0.46 for Q1 2012). While I’m generally optimistic about Mondelez, the decline in EPS gives me pause. Give the company another quarter or two before jumping in to see if this is a trend. Management’s guidance suggests total EPS for 2013 will be in the $1.55 to $1.60 range, which translates to a forward P/E of around 17 or 18. This is not a take-off growth stock, and it isn’t priced like one – but the uncertainty regarding earnings as well as the significant dividend cut starting Q4 2012 are red flags. Wait and observe for this one.
Hershey saw a 5.5% increase in net sales in Q1 of 2013 (like Mondelez, results were driven primarily by additional volume.) Like Mondelez, Hershey saw some market share and revenue loss in gum. Overall, the company had a 9.4% sales increase in candy, mint, and gum (8.6% if Easter seasonal activity is excluded). Watch for the Brookside brand (which Hershey acquired in 2011) and its sales growth over the next few quarters. It may provide a significant new specialty segment in the U.S. market.
Internationally, Hershey is doing quite well (and still has a lot of room for growth ) – in China, Hershey’s Kisses added 1.2% to its market share for a total of 5.8% (that market share growth of roughly 26% in a year is particularly impressive.) Mexico is another standout market, with Kisses showing double-digit sales growth.
Management’s guidance is for EPS growth of roughly 12%. Hershey has steadily increased earnings, with EPS for Q1 of 2013 ($1.06) jumping significantly from Q1 2012 ($0.87). Annual EPS has shown steady growth - $2.21 in 2010 grew to $2.74 in 2011 and $2.89 in 2012.
Hershey has a credible plan for additional growth (despite being the U.S. chocolate market leader already), with expanded offerings and new brands (including Brookside) coming online, and yet it’s still priced reasonably – a P/E of 28.9 based on the trailing-12 months and a forward P/E of 21.7, according to Morningstar. A dividend yield of almost 2% isn’t too shabby either.
My soft spot for Tootsie Rolls (a lot of sugar-filled childhood memories) doesn’t mask the fact that this stock isn’t a good buy right now. Flat EPS (Q1 2013 was $0.15, while Q1 2012 was $0.15); annual 2012 EPS, at $0.86, matched 2010 EPS and increased slightly from 2011 EPS, and a low dividend yield (about 1%) don’t give me tremendous confidence in future growth or value for shareholders. Yet, the stock is trading at a premium valuation, with a P/E ratio of 36.6 for the trailing-12 months and a forward P/E of 26.6, according to Morningstar. It’s overvalued, and I don’t see a compelling story for growth. Avoid it.
It’s important to remember that each of these companies is a little different – Mondelez and Hershey both have dairy segments, while Tootsie focuses strictly on candy. This difference is most pronounced when comparing the others to Nestle, which markets frozen food (including Digiorno, Hot Pockets, and Lean Cuisine), ice cream (Haagen Dazs and Skinny Cow), juice (Juicy Juice), water (Perrier), and pet food (Purina), in addition to candy and coffee. The macro situation for Nestle will therefore be a little different from the other companies.
Sales were up 4.3% overall for Q1 of 2013. Double-digit growth in China and 5.3% sales growth in the U.S. were tempered by anemic results in Europe and the Middle East. Nestle saw a significant drop in demand in the Middle East, which will impact revenue as suppliers “have found themselves with too much stock” and will have to sell what they already have before they purchase more Nestle products. Nestle also lost a factory in Syria, which may affect the supply chain in the Middle East.
Nestle pays a nice dividend (yielding almost 3%), and has a bundle of brands, which provide a good hedge against one sector or another doing poorly. The diversification of its portfolio is, to my mind, a big strong point. Watch for expansion in the pet-care, coffee, and water lines (water had a disappointing first quarter, but I still see plenty of future growth there.) Valuation is a piece of this as well; with a P/E ratio of 18.7 and a forward P/E of 15.7, Nestle is reasonably cheap compared to the others.
To keep things short and sweet (pun intended), I feel best about Hershey for the long term. I think it has the most credible growth plan, and management has shown their ability to keep the business chugging along even in the adverse environment of the last couple years. If you have money left over after investing in Hershey, buy Nestle for its broad and diverse portfolio and dividend yield. Mondelez is worth keeping an eye on, but I would hold off until we see sustained EPS growth. Tootsie is overpriced and should be avoided for now.
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