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The Hershey Company (HSY), Tootsie Roll Industries, Inc. (TR): Warren Buffett’s Sweet Tooth

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Berkshire Hathaway Inc. (NYSE:BRK.A) has interests in several delicious companies, it owns See’s Candies and has an undisclosed stake in privately held Mars after helping the company buy Wrigley.

Obviously Warren Buffett believes there is no dearth of candy lovers in the US now or in the future. You can go to the annual shareholders’ meeting and buy See’s Candy. Warren wrote in his annual letter to shareholders,” Anyone who says money can’t buy happiness simply hasn’t shopped at our meeting.”

hedge funds vs. mutual funds

Portable happiness
If you agree with Warren’s sweet-tooth thesis, there are only a few candy stocks out there. The Hershey Company (NYSE:HSY), the nation’s largest confectioner, Tootsie Roll Industries, Inc. (NYSE:TR), and not a totally pure play Mondelez International Inc (NASDAQ:MDLZ), the international company that spun off Kraft Foods Group Inc (NASDAQ:KRFTlast October.

There’s no better time to invest in these candy companies with only two months until Halloween and four months until the holidays. Note that snack and candy companies traditionally have pricing power as they are a low-cost indulgent impulse purchase and consumers rarely notice price increases. If you want a sweet consumer defensive with yield, The Hershey Company (NYSE:HSY) may be the best bet.

Despite working with a commodity that encounters wild double-digit swings in price, cocoa, The Hershey Company (NYSE:HSY) has enjoyed appreciation of 248.4% in the last decade. It has a yield of 2.1%, increased every year for the last four decades except in 2009. The payout ratio of 51% is close to the industry average of 52%.

The company has grown EPS by 21.3% over the last five years by various cost efficiencies, like overhauling and modernizing a factory in West Hershey, Pa. as part of its Project Next Century program. Operational savings from the project are supposed to be fully realized in 2014. Charges related to the program raised the cost of sales 8.6% in the first half, as noted in the company’s latest 10-Q .

While its price-to-sales ratio at 3.1 is higher than the industry average of 2.6, its price-to- free-cash-flow ratio is lower at 44 to the industry’s 96.4.

Mondelez International Inc (NASDAQ:MDLZ) should be looking over its shoulder at Hershey, which has introduced new candies into China and expanded manufacturing in Brazil. The Hershey Company (NYSE:HSY) is already operating in over 90 countries. Hershey dearly wanted Cadbury’s and lost it to Kraft. It purchased Brookside Foods, a Canadian candy maker in 2012, whose products will be launched in this year’s second half along with Kit Kat minis, Twizzler bites and Jolly Rancher bites. This is significant as the company has expanded its line of these diminutive (enough to enjoy, not enough to share) treats over the last year as a form of portable happiness.

To support these launches, advertising expenses rose 22% from last year’s quarter and will again rise in the back half to support China and Brookside. The company also opened an innovation center in Shanghai in May to research and develop products for the Chinese market, its fastest growing market.

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