Festive Stocks with Sweet Prospects

The beginning of autumn heralds the holiday season. It’s the time of year when chocolate goes from being a sinful indulgence to the embodiment of festive cheer – and an investment reason.

Chocolates are more than just a source of comfort and conviviality. Chocolate, and indeed the entire confectionery market, represents a delectable array of options for investors looking for seasonal opportunities. The global chocolate confectionery market appears to be in a sweet spot, projected to expand from US$136 billion in 2020 to US$161 billion in 2026, growing 3% annually.

Studies show that chocolate has become a lifestyle choice globally, with people buying the dark, decadent treat routinely to alleviate stress, even for their “health benefits”. The following names are dominant players controlling the bulk of the global chocolate market with bountiful offerings.

Leading U.S. confectionery maker, Hershey (HSY) controls around 46% of the nearly US$25 billion domestic chocolate market. Apart from its eponymous label, the firm owns 90 brands including Reese's, Kit Kat, Kisses, and Ice Breakers, sold across 85 countries, including Brazil, China, India, and Mexico.

Over the past few years, the firm has expanded beyond its core confection business by adding Amplify Snack Brands and its Skinny Pop ready-to-eat popcorn to its mix.

Despite competitive and macroeconomic pressures, wide-moat Hershey's dominance in U.S. confectionery has been unwavering, says a Morningstar equity report, which applauds “the strategic focus CEO Michele Buck has brought to helm--ramping up investments in its core domestic brands while pulling back international (10% of total sales) spend.”

Given the impulse nature of the purchase, the confectioner’s category mix has been impacted by the pandemic that forced widespread cuts to grocery trips.

However, after a rough 2020 “Hershey has begun chalking up more modest gains (including 6% sales growth in Q2 relative to the same period in 2019),” says Morningstar equity analyst, Erin Lash, stressing that the firm boasts “a runway for additional improvement over the longer term,” forecasting mid- to high-single-digit top-line growth annually beyond its home turf.

Hershey's robust intangible assets and cost advantage carve a strong competitive advantage. “Its dominant share at home, leading brands, and sufficient resources, [make] Hershey a critical partner for retailers that are reluctant to risk out-of-stocks with unproven suppliers, supporting the intangible asset source of its wide moat,” says Lash, who puts the stock’s fair value at US$139.

Nestle (NSRGY) is the largest food and beverage manufacturer in the world by sales, generating more than CHF 90 billion (US$98 billion) in annual revenue. The company’s diverse product portfolio includes brands such as Nestle, Nescafe, Perrier, Pure Life, and Purina. Nestle’s popular chocolate brands KitKat, Milkybar, and Aero are sold across 189 countries, along with other products in its stable.

Nestle’s vast product portfolio boasts at least 34 brands that rack up CHF 1 billion (US$1.09 billion) individually in sales each year.

“As the largest food company in the world, Nestle boasts a broad portfolio of products across multiple categories and regions spanning beverages, dairy products, nutrition and healthcare, ready-made meals, confectionery, and pet care, a global market position that is tough for new entrants to match,” highlights a Morningstar equity report. 

While Nestle faces intensifying competition from smaller, more nimble rivals, its “prudent research and development, marketing, and trade spending ensure that [Nestle’s] products will always be in sync with the latest local consumer trends and easily available wherever consumers are shopping,” argues Morningstar equity analyst, Ioannis Pontikis.

A strong multicategory, multinational presence makes Nestle an essential A-brand manufacturer and supplier for retailers and differentiates the company from smaller competitors.

A broad and resilient product portfolio affords Nestle a diversification advantage “that de-risks its global brand position, leading to a negligible likelihood of meaningful aggregate value destruction over a long-term horizon,” contends Pontikis who recently raised the stock’s fair value from US$103 to US$106 per ADR.

King of the hill in the chocolate market, Mondelez (MDLZ) owns such well-known brands as Oreo, Chips Ahoy, Halls, Trident, and Cadbury, among others. The company commands a leading position in multiple product categories spanning biscuit (48% of sales), chocolate (31%), gum/candy (10%), beverage (4%), and cheese and grocery (7%) aisles.

The confectioner derives a third of revenue from developing markets, about 40% from Europe, and the rest from North America. Further, about seven of its brands generate annual sales of more than US$1 billion each. 

Mondelez is targeting 3%-plus sales growth long term through selling its products in more channels and reinvesting in new products aligned with the latest consumer trends. To that end, the company “has looked to acquire niche brands to build out its category and geographic exposure, which we think has been prudent,” says a Morningstar equity report.

Mondelez enjoys a sustainable competitive advantage underpinned by the economies of scale gained from its expansive global network. It derives around 70% of revenue from outside its home market. Its competitive edge is further “buoyed by its entrenched retail relationships, stemming from the vast resources it expends to support its portfolio of well-known brands, which ultimately aides retailers' quest to drive traffic into outlets,” says Lash who recently edged up the stock’s fair value from US$57 to US$58, incorporating slightly higher near-term sales, time value, and expectation for an increase in the U.S. corporate tax rate in 2022.

Longer-term, Lash continues to believe the firm could benefit from the accelerating performance of emerging markets.