How the Currency of Affection Fattens Your Wallet
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Mad Men's Don Draper killed his career with his pitch to the execs at Hershey (NYSE: HSY) but he got one thing right about the All-American confectioner when he brought it home saying, "Hershey's is the currency of affection."
Don initially pitches a golden childhood moment, the reward after doing his chores of a Hershey bar from his hair-tousling and doting father. Hershey execs nod and mutter, " Hmm... sweet tales of childhood." Then Don blows it big time in an uncharacteristic truth bender... how he grew up an orphan in a house of ill repute and, " the only sweet thing in my life," was the Hershey bar he would earn from "helping out" the girls.
Needless to say, the cringeworthy moment for Don's partners and the Hershey execs prompts a stunned Hershey exec to ask, " Do you want to advertise that?!"
Moments before, he won them over gesturing to the recognizable Hershey brown and silver wrapper saying, "The product itself is one of the most successful billboards of all time."
How 'bout the stock, Don?
The stock has run big, from the low $30s four years ago to a multiyear high of $91.99 in April. Let's be as brutally honest as Don and say maybe it has run too far, too fast as a beneficiary of the frantic search for safety among consumer staples.
It trades at a trailing P/E of 28.15 with a forward P/E of 21.45. The PEG is 2.45 with a yield of 1.90%. The five core global brands are Hershey’s, Reese’s, Hershey’s Kisses, Jolly Rancher, and Ice Breakers.
Two initiatives that have helped sweeten EPS lately are an overall company-wide efficiency drive including a new factory building in Hershey PA and smaller portions as an affordable pleasure.
Hershey's main competitors are international food giant Nestle , Mondelez International (NASDAQ: MDLZ), privately owned Russell Stover Company, Tootsie Roll Industries (NYSE: TR), Yildiz Holding which owns Godiva Chocolate, Rocky Mountain Chocolate Factory, and privately held M&M Mars.
Of these rivalries competition between M&M Mars and Hershey's has been the most fierce with C-suite poaching and ad battles. M&M Mars is famously reticent but it's no secret they recruited the CIA for intelligence on international candy makers in 1981 producing reports on Soviet and Eastern European confectioners.
Once strategic partners, their race for shelf space is an epic documented in the book, The Emperors of Chocolate. Hershey's has limped behind in 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.
Battling to be the foreign currency of affection
Mondelez spun off Kraft Foods Group last fall keeping CEO Irene Rosenfeld (who snatched Cadbury's right out from under Hershey's nose) and the largest brands: Cadbury's, Oreo, Lu, Tang, Jacobs, Trident, and Nabisco. Confectionery constitutes 40% of revenues. The company's net income for 2012 was $35 billion, compared to $6.6 billion for Hershey and both have an expected five year sales growth rate of 23%.
Mondelez trades at a lower trailing P/E of 18.36 with a forward P/E of 16.57 and a PEG of 1.59. It only offers a yield of 1.80% as it is deemed to be the international grower between it and spinoff Kraft Foods Group, the domestic name with double the yield at 3.70%.
Hershey's attempt to buy Cadbury's was hamstrung by the Hershey Trust, the non-profit foundation that has a controlling interest. Corporate governance risk for Hershey is low except for shareholder rights and shareholders should know how much influence the Trust wields. The trust is responsible for the charitable Milton Hershey school, mentioned in Don's confession as his dream home instead of the squalid, loveless bordello.
Don points out Hershey's has a, "relationship with Americans that is so overwhelmingly positive." The US is where it does its best business.
In 1999 former Hershey CEO Richard Zimmerman was quoted in The Emperors Of Chocolate that it would take a quarter century to compete internationally at the level of Nestle, Mars, and Mondelez.
Hershey already had gained favor in Europe in WWII as generous American soldiers gave away the bars to war-weary Europeans, again as a currency of affection. Nonetheless, Cadbury's is the favored brand across the pond making Rosenfeld's purchase a major coup.
Hershey has made some strategic international acquisitions but Mars and Mondelez still outsell them globally. Mars managers generally speak at least three languages. Earlier this year 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.
International competition is so fierce it precipitated a price-fixing scandal in Canada involving Mondelez, Nestle, and Hershey. Hershey has been fined $3.8 million for its part.
On the domestic scene rival Tootsie Roll's stock has moved up 42.50% this last year. Its trailing P/E is 36.09 and has a 1.00% yield. It is a low volume ( 86,014 shares traded) and low beta stock (.84), yet has a large short interest at 16.20%. They do business in the US and Mexico.
Tootsie Roll is primarily a family company,controlled by members of the Rubin-Gordon family since The Great Depression with 93 year old Melvin Gordon as CEO and his wife Ellen, as COO. The Board rewards them with "sweet" perks like company jet use and subsidized apartment as noted by Fellow Fool Adam Wiederman.
Management seems to be content with their portfolio of vintage brands like Tootsie Roll, Sugar Daddy and Nik-L-Nip.Tootsie Roll needs a Don Draper image shake-up with sales growth expected at only 13%.
Which will fatten the wallet?
Tootsie Roll is a company with too many reasons not to buy: a crony culture on the Board, old-fashioned image, high P/E, and big short interest.
Mondelez may have the currency of affection overseas for now and slightly better growth but beloved brand Hershey has been aggressively innovating. As Don said,"Love and chocolate are tied together and that's the story we're going to tell."
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