These Choc Stocks Are Still on The Up

For makers of dark and decadent dollops of indulgence, Valentine’s Day is a delight, so how do three of the key brands compare?

Vikram Barhat 13 February, 2023 | 10:20AM
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Chocolate hearts

Valentine's Day is a lucrative occasion for the confectionery industry, as chocolates have become a popular expression of love, joy, and self-care. Confectioners have also been benefitting from increased demand for chocolates year-round.

More so than ever. Chocolate seems to be one of the few food items to withstand healthy eating. One estimate says the global chocolate market is projected to skyrocket from US$186 billion in 2022 to US$312 billion in 2030, growing at a 6.4% annual clip.

With chocolate becoming a popular lifestyle choice worldwide, the following dominant players in the market are poised to reap delicious benefits. These companies control a significant portion of the global market and offer a wide range of products.

US confectionery giant, Hershey (HSY) controls around 47% of the nearly $25 billion domestic chocolate market. The company boasts a portfolio of 100 brands, including some of the most recognisable chocolate names: Hershey, Reese's, Kisses, and Ice Breakers.

The company’s footprint spans 80 countries including Brazil, India, and Mexico, but only a high-single-digit percentage of sales come from markets outside the US

"While consumers are facing mounting costs in a number of facets of their lives, this has yet to tame their appetite for confectionery and snacking fare, as evidenced by the double-digit sales growth Hershey has chalked up the past few quarters," says a Morningstar report.

This, the report adds, isn’t just a by-product of healthy demand, but the result of the firm’s strategic focus on ramping up investments in its core domestic brands while curtailing its international arm.

That said, the firm isn’t immune from the ongoing widespread inflationary headwinds and supply chain disruptions. In fact, the company is calling for high-single-digit inflation in fiscal 2023, stemming from higher cocoa, labour, and freight costs.

The wide-moat firm has shown resilience in the face of these challenges evidenced by its most recent earnings report showing a jump of 10.7% in organic sales.

"Despite persistent inflation, Hershey’s efforts to raise prices and extract inefficiencies resulted in a 20-basis-point increase in adjusted gross margin to 43.7%," says Morningstar equity analyst Erin Lash, who recently increased the stock’s fair value to US$169, from US$165, prompted by a more favourable near-term sales and profit outlook.

Oreo maker Mondelez (MDLZ) owns many other household brands including Chips Ahoy, Halls, Trident, and Cadbury, among others. The firm is a leading player in the global snack arena with a dominating presence in the biscuit (47% of sales), chocolate (32%), gum/candy (10%), beverage (4%), and cheese and grocery (7%) aisles.

The confectioner derives over one-third of its revenue from developing markets, nearly 40% from Europe, and the remainder from North America.

As part of its turnaround efforts, Mondelez is targeting 3%-5% sales growth long term as it works to sell its wares in more channels and reinvests in new products aligned with consumer trends. Mondelez has also "looked to acquire niche brands to build out its category and geographic exposure, which we think has been prudent," Morningstar's report says.

Management’s efforts to cut costs could see "an additional [saving of] $750 million in costs [which] can be achieved by extracting further complexity from its operations, including rationalizing its supplier base, parting ways with unprofitable brands, and continuing to upgrade its manufacturing facilities," says Lash, who recently ticked up the stock’s fair value from US$64 to US66, prompted by solid quarterly results.

Lash also notes the wide moat firm’s top-line mark was particularly impressive, as organic sales jumped more than 15% in the fourth quarter on almost 14% higher prices and a nearly 2% contribution from higher volumes. 

"Mondelez’s judicious focus on its long-term brand standing hasn’t wavered despite persistent inflationary pressure that brought a 120-basis-point downdraft in its [quarterly] gross margin," she says.

Global food and beverage heavyweight, Nestle (NSRGY) boasts a geographic presence that spans almost 190 countries. It racked up more than CHF 90 billion (US$92 billion) in annual revenue. The firm’s portfolio includes popular chocolate brands such as KitKat, Milkybar, Smarties and Aero. Nestle also owns just over 20% of the cosmetics firm L'Oreal.

The company’s rich portfolio of global products includes more than 30 brands that each ring up over CHF 1 billion in sales annually. Nestle's performance benefitted as pandemic-led lockdowns and work-from-home trends boosted consumption of coffee at home, says a Morningstar equity report, but warns that "while we don't expect a reversal of these trends in the future, we do expect outperformance to be less pronounced in the years ahead."

Although Nestle utilises its well-established supply and distribution networks to promote merchandise tailored to the unique tastes and preferences of local markets, "global fast-moving consumer goods behemoths such as Nestle [could] still face competition from small, local, and more agile competitors," cautions Morningstar equity analyst Ioannis Pontikis, who recently revised the stock’s fair value to US$113 from US$110 per ADR.

Faced with the challenge of excess costs due to high inflation, Nestle has decided to implement additional price hikes, according to Chief Executive Ulf Mark Schneider. Further, the company recently upgraded its 2022 sales target and outlined ambitious plans for 2025.

The Swiss packaged-food giant projects a return to operating profit margin between 17.5% and 18.5%, countering the margin impact of cost inflation over the last couple of years. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Mondelez International Inc Class A66.69 USD-0.13Rating
Nestle SA ADR101.69 USD-1.65Rating
The Hershey Co185.80 USD-1.95Rating

About Author

Vikram Barhat  is a Toronto-based financial writer specialising in investing, stock markets, personal finance and other areas of the financial services industry. 

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