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Hershey Co (HSY), Mondelez International Inc (MDLZ): A Sweet Tooth for Success

Milk chocolate bars. Reese’s Peanut Butter Cups. Kisses chocolates. Payday bars. Milk Duds. Jolly Ranchers. The only thing sweeter than these goods is the stock of the company that produces them: Hershey Co (NYSE:HSY)’s is up 18.3% year-t-date and still has significant upside potential.

Hershey Co (HSY)

One of the main reasons Hershey’s stands out from its competition is the extent to which it is determined to aggressively expand. Although many blue chip companies are satisfied with steady growth and consolidating existing revenue streams, Hershey’s has a sky high goal to reach $10 billion in revenue by 2017. To put this context, Hershey’s 2012 revenue was $6.6 billion and the 50% revenue increase by 2017 will require, as noted by its Chief Growth Officer (yes, it has a Chief Growth Officer), a very aggressive top-line growth rate. Moreover, Hershey’s expects to achieve net sales of $1 billion in markets outside of Canada and the U.S. by the end of 2014.

The hallmark of Hershey Co (NYSE:HSY)’s growth strategy is based on a proven socioeconomic trend: as people become richer, they have more disposable income, which leads them to spend more on nonessential items, such as confectionaries and sweets. That’s why Hershey’s is targeting countries across the world that have high populations and strong GDP growth. For example, Hershey’s has put China at the top of its priority list and is seeing huge opportunity in tapping into one of the largest middle-class transitions in history. Hershey’s current product pipeline in China, which includes Hershey’s Kisses and solid chocolate globes, is doing extremely well. In 2013, Hershey’s plans to expand its footprint in China with new products such as premium Kisses Deluxe products and Hershey’s Drops.

By 2017, Hershey Co (NYSE:HSY)’s wants to expand international sales to 25% of total sales from the current 16%. This goal is buoyed by the fact that China isn’t the only international market where Hershey’s products are well-received. Hershey’s net sales in Brazil and Mexico (as well as China) were all above plan, with local currency sales in these markets up double digits year-over-year. Additionally, Hershey’s recently became the #2 player in the Mexico off of its strong sales, and in Brazil its chocolate business grew at a pace more than double the category growth. In Canada, Hershey’s is gaining significant market share (1.4 percent increase in the fourth quarter of 2012 alone) in the sweets and refreshment category and its Reese’s brand is the #1 chocolate brand in the country.

That’s not to say that Hershey’s is neglecting its U.S. market. Hershey’s domestic performance is strong and holds significant potential. For one, it has the largest market share (43.1%) of the U.S. chocolate and its US chocolate retail sales are healthy, with a cumulative average growth rate of 6.1% in the last four years. For 2012, Hershey’s U.S. retail takeaway and market share of candy, mint, and gum was up 5.7%. Recently, Hershey’s acquired Brookside, a privately-held Canadian confectionery company that produces chocolate-covered fruit with unique fruit juice centers. This acquisition can significantly boost Hershey’s earnings in the long-term as Brookside has increased sales at a compound annual growth rate of about 20% over the last several years. Combined with Hershey’s additional manufacturing capacity and plans to expand its U.S. presence, Brookside is poised to easily increase 2013 net sales growth by over 20%.

Moreover, Hershey Co (NYSE:HSY)’s domestic and international performance will be significantly boosted by its marketing and promotion prowess. Many of Hershey’s products have near-universal brand recognition and Hershey’s is a brand often associated with taste and quality. Building on this brand recognition, Hershey’s has also announced plans to increase advertising by 20% in 2013 and already has a huge marketing network, from the Reese’s NCAA basketball program to Twizzler tie-ins with the upcoming Superman movie to various Jolly Rancher and Twizzlers promotions with Gym Class Heroes. Moreover, Hershey’s marketing research is cutting-edge, utilizing such techniques as mind modeling and proprietary research techniques. This marketing research has led to such profitable changes as resealable confectionery bags and currently shows that Brookside products hold significant appeal to not only candy-lovers, but people who don’t have sweet tooths.

So what has this all meant for Hershey’s? It has had four consecutive years of double-digit EPS percentage increases averaging about 13%. It also has a solid three-year sales growth rate of 7% and an extremely healthy annual ROE of 78.1%. In the last quarter, Hershey’s reported a strong 12% increase year-over-year in sales. Hershey’s financial strength has also allowed it to post a quarterly dividend of $0.42 a share, a figure which has only gone up since its introduction.

Few, if any, of  Hershey Co (NYSE:HSY)’s competitors have its valuable combination of aggressive international expansion and solid growth. General Mills does not have nearly as aggressive of an international expansion strategy as Hershey’s does and currently only derives 12% of its total sales from international markets. Others, such as Kellogg Company (NYSE:K), have seen international segments decline in performance; in Kellogg’s third quarter of 2012, it noted that its international segment posted a 6% decline in sales and an 11% decline in operating profit. Competitors such as ConAgra Foods don’t even have operations outside of North America. The only major competitor that has more of an international presence than Hershey’s is Mondelez International Inc. (NASDAQ:MDLZ), but its growth has actually been decreasing: the company’s 2012 revenue declined 2.2% and EPS declined a huge 11.34%.

Catalysts such as aggressive international expansion, domestic dominance, marketing strength, and smart acquisitions ensure that Hershey Co (NYSE:HSY)’s is a must-own stock for anyone who wants to make a sweet profit.

The article A Sweet Tooth for Success originally appeared on Fool.com and is written by George Liu.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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