A Sweet Chocolate Buy?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

According to Charlie Munger, the key to successful long-term investing is to find a great company, buy it when it is trading at a significant discount to its intrinsic value, and stick with it for the long term. Warren Buffett has become a better investor over time, moving from buying cigar butts below the liquidation value to buying great businesses at fair prices. Recently, senior analyst John Kozey of Thompson Reuters listed 28 businesses that are “Buffett-Like Investments”. In previous articles, I talked about three companies on the list, including Mosaic, Archer Daniels Midland, and Sysco. In this article, I would like to cover one more consumer non-cyclical stock in the list, The Hershey Company (NYSE: HSY).

Business snapshot

Hershey, founded in 1894, is the biggest chocolate producer in North America and a world leader in chocolate and sugar confectionery, selling chocolate, sugar confectionery products, and pantry items under 80 brand names in 70 countries. The company’s main customers are wholesale distributors, mass merchandisers, chain drug stores, and department stores. The largest customer was McLand Company, one of the largest wholesale distributors convenience stores, drug stores and mass merchandisers in the US, accounting for 22.2% of the company’s total net sales.

Consistent growth, increasing dividends, and share buybacks

What impresses me is the consistent growth in the company’s top line and bottom line. Eevenue increased from $4.95 billion in 2007 to $6.64 billion in 2012 while net income advanced from $214.1 million to $660.9 million in the same period. In the past five years, its net income has delivered a five-year compounded growth rate of 25.3%. In 2012, EPS came in at $2.89. In its operation, Hershey seems to employ a lot of leverage. As of December 2012, Hershey had more than $1 billion in total shareholders' equity, $728.3 million in cash, $118 million in short-term debt and as much as $1.53 billion in long-term debt. The low equity value was mainly due to the increasing amount of treasury stock over time. Its treasury stock has grown from more than $4 billion in 2008 to nearly $4.56 billion in 2012.

Long-term investors should be quite interested in its terrific historical dividend record. The company has paid uninterrupted dividends for 333 quarters, with the dividend payout ratio of about 50%. In the past 10 years, the dividend has increased from $0.72 per share in 2003 to $1.56 per share in 2012. In addition, for the past two years, Hershey returned cash to shareholders via share repurchases as well. The total cash returned to shareholders in 2011 and 2012 was $404 million and $466 million, respectively.

Peer comparison

Hershey has a wide moat. In the US, Hershey is the number one player in the chocolate industry with a 43% market share. The closest competitor of Hershey is Mars, with a 30% market share. Nestle (NASDAQOTH: NSRGY) ranked third in the U.S. chocolate market with only 6% market share. Mondelez International (NASDAQ: MDLZ) is also one of the big players in the global chocolate industry. However, Mondelez mainly operates outside of the U.S.; North America accounted for only 1% of total chocolate revenue, while developing markets and Europe accounted for 12.8% and 12.9% of total chocolate revenue, respectively.

Hershey is trading at $83.45 per share, with a total market cap of $18.7 billion. The market is valuing Hershey at nearly 14.2 times EV/EBITDA. Nestle is the biggest company among the three, with $220.55 billion in total market cap. At the current trading price of $69.16 per share, Nestle is valued at 12.92 times EV/EBITDA. Mondelez, trading at $27.80 per share, is worth $49.45 billion on the market. It has the cheapest valuation at 12 times EV/EBITDA.

Among the three, Hershey seems to be the most profitable company with the highest operating margin at 18%. While Mondelez generated the lowest operating margin at 12%, the operating margin of Nestle stayed at 16%. Mondelez is paying the highest dividend yield at 3.6%, while the dividend yields of Nestle and Hershey are 2.6% and 1.9%, respectively.

Foolish bottom line

All of the three stocks above could be considered great income stocks for long-term investors. With the leading position in the U.S. chocolate industry, Hershey could be considered a safe bet. However, it is trading at a bit rich of a valuation. Personally, I would not initiate a long position in Hershey at its current price.  


hoangquocanh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus