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 Inc (NASDAQ:MDLZ), Hershey Co (NYSE:HSY), Tootsie Roll Industries, Inc. (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 International Inc (NASDAQ:MDLZ) has focused on what management terms the “power brands,” which are market-leading moneymakers like Oreo, Chips Ahoy!, Triscuit, and Cadbury. Mondelez International Inc (NASDAQ:MDLZ) 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 International Inc (NASDAQ:MDLZ) 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 International Inc (NASDAQ:MDLZ), 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 Co (NYSE:HSY) saw a 5.5% increase in net sales in Q1 of 2013 (like Mondelez International Inc (NASDAQ:MDLZ), results were driven primarily by additional volume.) Like Mondelez, Hershey Co (NYSE:HSY) 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 Co (NYSE:HSY) 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 Co (NYSE:HSY) 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 Roll Industries, Inc. (NYSE:TR) (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.