Is it Worth Investing in Chocolate?
Lior is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I have noticed in a recent interesting article regarding chocolate that its consumption continues to rise in the U.S. This data point, along with the positive financial results of leading chocolate manufacturers, might imply a potential investment opportunity. Now I do like chocolate and I have the waist girth to show for it, but is chocolate also a product worth considering? Let's examine this subject.
Is Chocolate Consumption Rising?
According to this article, U.S consumption has increased from 3.323 billion pounds in 2000 to nearly 3.616 billion pounds in 2010. These figures are close to the numbers quoted by the International Cocoa Organization in their global Chocolate Consumption report. Based on these figures, the total growth in consumption was nearly 8.8% during the decade. This rise, however, doesn’t consider the growth of population. Based on an average 1% annual growth in U.S population, the total growth in population is about 9.3%; this means the total consumption, after controlling for population growth, declined by -0.5% during the decade. Based on the International Cocoa Organization report (table 14), the U.S consumption per capita has declined from 5.32 pounds in 2000 to nearly 5.09 pounds in 2008 – an estimated 4.3% drop in consumption.
Therefore, most of the growth in consumption is from population growth in the U.S. Moreover, the decline in U.S consumption of chocolate per person is curbing the growth in total consumption. This means the consumption in the U.S is declining.
Chocolate Companies and the S&P 500
Based on the figures above, the volume of growth in sales of leading chocolate related companies shouldn't be more than population growth. Let's examine this matter: Revenues of Hershey Company (NYSE: HSY) have increased by 7.5% in the third quarter of 2012 compared to Q3 2011. This rise, however, was due to a 3.9% gain in net price realization and only a 2.1% gain in volume. During the first nine months, the company's revenue growth was 8.4%. Since the U.S economy (real GDP) increased by 3.1% (in annual terms) during the third quarter, this could suggest most of the growth in volume was consistent with the economic growth of the U.S economy. Compared to the financial markets, shares of Hershey rose by 16.3% during the year (year-to-date), while the S&P 500 increased by 11.2%.
Mondelez International (NASDAQ: MDLZ), a spinoff of Kraft Foods and another chocolate related company, hasn't done as well as Hershey and its revenues declined during the first nine months of 2012 by 1% compared to the same time in 2011.
This type of growth in stock price and revenue for Hershey is consistent with other leading food companies such as Kellogg Company (NYSE: K) and General Mills (NYSE: GIS): According to their respective recent quarterly reports, revenues of Kellogg increased during the quarter by 12.3% compared to the same quarter in 2011; revenues of General Mills rose by 5.6%. The data shows that the growth in sales for Hershey wasn't higher than other food related companies, so the chocolate industry isn't showing more growth than other food companies.
Another factor worth noticing is the potential ramifications of price changes in commodities related to the production of chocolate, such as cocoa.
Cocoa Production Is Falling While Prices Are Rising
Cocoa production dwindled in recent months: According to a recent report by the International Cocoa Organization, current estimates are that the world production has declined from 4,313,000 tonnes in 2010/2011 to 4,052,000 tonnes in 2012/2011 – an estimated 261 thousand tonne drop, or 6.1% during the year. Moreover, cocoa prices have risen in recent months, but they are still well below their 2011 levels. As of November 2012, the average monthly price of cocoa was set at $2,478.16 per tonne, which is nearly 2% lower than the same time last year. Even though the leading chocolate producers, such as Hershey, hedge against fluctuations in the cocoa market, it's still an uncertainty that could affect their profit margin next year, and also their market valuation; if cocoa prices, one of the major inputs for making chocolate, rise, then the profit margin in the long run may decline, which will be reflected in the company's market value (assuming we use DCF).
The Bottom Line
Even if shares of Hershey and other leading chocolate companies continue to rise, this may be just a result of a steady economic growth and not a rise in consumption per person (at least in the U.S). Therefore, it might be prudent to consider other companies that could offer growth in sales beyond the general economic development in the U.S.
For further reading: Why Coffee Prices aren’t affecting Starbucks?
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