Sweets For The Sweet

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

Valentine's Day is not just for romance, but also for commerce and the National Retail Federation expects young love to conquer and 20-somethings traditionally spend the most. But where do they spend the majority of their Valentine budget? Candy is the big winner at 60.3%.

With the cost of a two year courtship and wedding at $43,843 for Canadians (I think you can tack on at least 10% to that number for American couples), buying candy on Valentine's Day is getting off easy. Along with Christmas and Halloween, Valentine's Day is one of the big sales drivers of the year.

Gimme Some Sugar

The go to name here is of course, Hershey (NYSE: HSY). Hershey has been giving portfolios a lot of sugar for the past few years. A five dollar stock in the 1980s it hit another all-time high on February 11 of $80.64. Goldman Sachs downgraded Hershey on February 4 to neutral from Conviction Buy not based on any flawed fundamentals, but actually on the share price strength. It raised the price target to $86 from $84.

The stock is trading at a 27.75 P/E with a 2.10% yield. The Q4 earnings in January were tooth-achingly sweet with raised guidance, raised margins, and net sales coming in $200 million better than Q4 2011, and market share gain in all categories: chocolate, non-chocolate, mint, and gum.

Cutthroat Competition

Despite the popularity of chocolate fountains Hershey's does not have a chocolate moat with artisan chocolatiers popping up as frequently as cupcakeries. Competitors include privately owned candy giant M&M Mars, Mondelez International (NASDAQ: MDLZ) the Kraft spinoff which owns Oreos and Cadbury, privately owned Russell Stover Company which makes the iconic Whitman's samplers, Tootsie Roll Industries (NYSE: TR), Yildiz Holding which owns Godiva Chocolate, Rocky Mountain Chocolate Factory, and international food giant Nestle . And you thought the cupcake business was cutthroat!

Hershey's isn't all chocolate, it also has nuts, gum, and mints but chocolate has been their bread and butter so to speak. It competes most closely with M&M Mars. Over the years this has been a somewhat bittersweet rivalry with C suite poaching and ad battles. M&M Mars is famously reticent about their business affairs but it's no secret that McLean, VA based M&M Mars recruited the CIA (also headquarterd in McLean) for intelligence on international candy makers in 1981 producing reports on Soviet and Eastern European confectioners. Surprisingly the two companies were once strategic partners but now their battle for shelf yardage at groceries, convenience stores, big box stores is almost epic and was documented in a fascinating book, "The Emperors of Chocolate."

In many ways Hershey's has been a day late and a dollar short when it comes to this race as Mars pioneered the use of weather satellites as well as a fleet of statisticians to gain an edge on commodity costs in cocoa, sugar, and peanuts.

The Wild World of Chocolate

Just in 1999 former CEO Richard Zimmerman was quoted in "The Emperors Of Chocolate" that he thought it would take a quarter century to compete internationally at the same level as Nestle, Mars, and Mondelez (then part of Philip Morris).

Internationally, Mondelez is the name getting all the love as CEO Irene Rosenfeld swiped Cadbury right from under Hershey's nose. A Hershey attempt to buy Cadbury's was hamstrung by the Hershey Trust, the non-profit foundation that has a controlling interest. Corporate governance is low on all metrics except for shareholder rights and shareholders need to be aware of the influence the Trust wields.

Mondelez is the international spinoff from Kraft Foods and seems to be trapped in a mid-twenties range. It reports on February 13 and this second earnings report for full year 2012 results will be key with confectionery comprising 40% of its revenues and directly competing with Hershey, especially in the very competitive emerging markets. Mondelez has a 14.84 P/E and a 1.90% yield.

International is still Hershey's Achilles heel and more than one analyst has bemoaned the fact. Hershey has made some astute international acquisitions but Mars and Mondelez still outsell them globally. In fact, Mars managers generally speak at least three languages if not more. But on the Q4 call Hershey announced the completion of a new innovation center in Shanghai and increased spend on global rollouts of key brands, specifically Hershey Mais in Brazil and Hershey Kisses Deluxe in China.

Domestic Duds

Back here in the US Hershey does its best business but rival Tootsie Roll has all but rolled over as a competitor. It is very thinly traded (average volume is only 33,000) for such a well-known brand, but the company has a portfolio of fuddy duddy or retro, whichever you prefer, brands and an even higher P/E than Hershey at 32.74 and only a 1.20% yield.

Tootsie Roll is basically a family run company that is still publicly traded and management seems to be content to keep on keeping on. They primarily do business in the US and Mexico. It would be surprising that one of these larger companies hasn't snapped them up as the big three have been on candy company buying sprees for decades except that the company is run by 91 year old Melvin Gordon as CEO and his wife Ellen, 81, as COO. The company has been in the control of various members of the Rubin-Gordon family since The Great Depression.

For such a low volume, low beta stock (.79) it has a fairly large short interest at 15.90%. I can't think of any compelling reason to buy Tootsie Roll except for hopes of a management wake-up.

Wrapping It Up In A Big Red Heart Box

Hershey's is making inroads on international which is exactly what they need to do. Mondelez is a name whose stock should be doing better with such a global headstart. If you are intrigued by Hershey's you should keep up with the intrigue between Mars and Hershey's. I agree with Goldman that Hershey's has gotten ahead of itself and would wait for pullbacks. Happy Valentine's Day!

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