With Halloween just a couple of weeks away, it’s officially the start of the festive season, a time of year when guilty pleasures and decadent desserts trump calorie counting. There’s no better time for emotional eating than during the coronavirus pandemic. At least, that’s what we tell ourselves, and at the top of most people’s “cheat” meals is chocolate.
No other food item has survived the onslaught of the healthy eating trend quite as well as chocolate. The worldwide chocolate confectionery market was valued at US$114.33 billion at the end of 2019 and is projected to reach US$136.42 billion by 2027, growing 2.3% annually. A more optimistic projection indicates the global chocolate market is set to reach US$171.6 billion by 2026, rising 5.3% annually.
It’s hard not to be tempted by the growth prospects of chocolate makers, once they bounce back from the pandemic-led sales decline. Long-term investors with a taste for the confectionary play may want to look at the following chocolate stocks. With strong fundamentals, product innovation and bountiful demand from emerging markets, these companies are well positioned to corner the largest slice of the global chocolate market. Most of them are at or above our fair value estimates, so investors may want to wait for a meaningful pullback to create some margin of safety and an attractive entry point.
| The Hershey Co | ||
| Ticker | HSY | |
| Current yield: | 2.14% | |
| Forward P/E: | 23.87 | |
| Price | US$150.42 | |
| Fair value: | US$131 | |
| Value | 15% Premium | |
| Moat | Wide | |
| Moat Trend | Stable | |
| Star rating | ** | |
| Data as of Oct 16, 2020 | ||
U.S. confectionery behemoth, Hershey (HSY) controls around 45% of the nearly US$25 billion domestic chocolate market. The firm owns more than 80 brands, including popular names such as Hershey, Reese's, Kit Kat, Kisses, and Ice Breakers. Although Hershey's products are sold in about 85 countries (including Brazil, China, India, and Mexico), just 10% of its total sales comes from outside the U.S.
Under the leadership of CEO Michele Buck, the company has been ramping up investments in its core domestic brands while pulling back international spend, says a Morningstar equity report. Hershey has seen some sales decline in recent times because of fewer trip to convenience and drugs stores (source of a quarter of its sale), and social distancing mandates.
“This has been partially offset by outsize e-commerce gains (where Hershey realized a robust 200% year-over-year sales jump in the second quarter), the reports says, but cautions that at just 2% of its sales mix, ecommerce won't materially aid its near-term trajectory.
On a positive note, though, while the pandemic will dampen the all-important Halloween period (which accounts for 10% of the firm’s consolidated sales), the remainder of the festive season sales are less likely to be impacted, says Morningstar sector director, Erin Lash, pointing to the firm’s resiliency played out during the 2008 economic recession. “With its mix of leading brands and focus on innovation, we don’t think Hershey is poised to drop the ball in this key period,” says Lash, who puts the stock’s fair value at US$131.
| Nestle SA ADR | ||
| Ticker | NSRGY | |
| Current yield: | 2.36% | |
| Forward P/E: | 24.04 | |
| Price | US$117.56 | |
| Fair value: | US$100 | |
| Value | 18% Premium | |
| Moat | Wide | |
| Moat Trend | Stable | |
| Star rating | ** | |
| Data as of Oct 16, 2020 | ||
The largest food and beverage manufacturer in the world by sales, Nestle (NSRGY) amassed more than CHF 90 billion (US$98 billion) in annual revenue. Its portfolio of global products includes brands such as Nestle, Nescafe, Perrier, Pure Life, and Purina. The company also owns popular chocolate brands including KitKat, Milkybar and Aero.
“Nestle boasts a broad portfolio of products across multiple categories and regions spanning beverages, dairy products, nutrition and healthcare, ready-made meals, confectionery, and petcare, a global market position that is tough for new entrants to match,” says a Morningstar equity report.
While Nestle faces competition from small, more agile competitors, it’s research and development, marketing, and trade spending capabilities ensure its “products will always be in sync with the latest local consumer trends and easily available wherever consumers are shopping,” says Morningstar equity analyst, Ioannis Pontikis.
Nestle’s wide economic moat is underpinned by its entrenched position with retailers and a durable cost edge. “The firm's structural baseline returns are in the mid- to high-teen percentage range, and we anticipate that it will generate excess economic profits for at least the next 20 years, supporting our wide moat rating,” says Pontikis, who puts the stock’s fair value at US$100 per ADR.
| Mondelez International Inc Class A | ||
| Ticker | MDLZ | |
| Current yield: | 2.16% | |
| Forward P/E: | 21.19 | |
| Price | US$58.34 | |
| Fair value: | US$53 | |
| Value | Fairly valued | |
| Moat | Wide | |
| Moat Trend | Stable | |
| Star rating | *** | |
| Data as of Oct 16, 2020 | ||
Chocolate and snack giant, Mondelez (MDLZ) owns household brands including Oreo, Chips Ahoy, Halls, Trident, and Cadbury, among others. The company dominates several products aisles including biscuits (44% of sales), chocolate (32%), gum and candy (13%), beverage (4%), and cheese and grocery (7%). It generates just over one third of revenue from developing markets, about the same level from Europe, and the rest from North America.
The confectioner’s wide moat stems from strong retail relationships and the vast resources it utilizes to support its portfolio of well-known brands, seven of which generate annual sales of more than US$1 billion each. These attributes help driver traffic into retail outlets. “As a leading player in the global snack category, Mondelez has earned a wide economic moat rating resulting from the economies of scale gained from its expansive global network, with nearly three fourths of revenue derived outside North America,” says a Morningstar report.
The snacking giant’s dominance is evidenced by its share of various markets in which it operates. “Mondelez holds the top spot in the sweet biscuits category (with 15% share of the worldwide space, according to Euromonitor) and is the second-leading global sugar candy manufacturer (with 2.4% share, primarily as Halls is the second-largest candy brand worldwide),” points out Lash, who puts the stock’s fair value at US$53.
