Three Chocolate Stocks to Add Flavour to Your Portfolio

For opportunistic investors, the following companies represent enticing prospects, trading at a sweet discount to their market value, offering an attractive entry point.

U.S. confectionery giant Hershey comprises 100 brands, including Reese's, Kit Kat, Kisses, and Ice Breakers. The firm controls 45% of the domestic chocolate market. Only a high-single-digit percentage of sales come from markets outside the U.S., including Brazil, India, and Mexico.

Defying the healthy eating trend, the company’s offerings are being lapped up by consumers, borne out by the solid profit and revenue numbers for the recent quarter. “Consumers' penchant for confectionery and snacking fare has yet to be fulfilled, as evidenced by the outsize organic sales growth Hershey has chalked up the past few quarters,” says a Morningstar equity report.

Defying headwinds created by elevated cocoa, sugar, and labour costs, Hershey has sustained its leadership in the U.S. market. “We’re encouraged that Hershey is firm in its commitment to funnel resources toward its brands, with advertising spending up around 20% in the third quarter,” says Morningstar equity analyst Erin Lash, adding that the firm will spend nearly US$1 billion on research, development, and marketing annually over the next 10 years. 

Solid intangible assets and cost advantage could continue to help its returns on invested capital to outpace its cost of capital over the next 20 years. “With its dominant share at home, leading brands, and sufficient resources, Hershey is 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 recently bumped up the stock’s fair value to US$197 from US$196.

Mondelez is a leading player in the global snack arena whose portfolio includes well-known brands like Oreo, Chips Ahoy, Halls, and Cadbury, among others.  Half of its sales are derived from biscuit, while chocolate (30%), gum/candy (11%), beverage (3%), and cheese and grocery (6%) make up the rest. Emerging markets account for nearly 40% of Mondelez's revenue, one third from Europe, and the rest from North America.

Given its financial strength, there are no significant obstacles to Mondelez's ability to manage money. As of September 2023, Mondelez had US$1.6 billion in cash and US$20 billion in total debt. “But given the vast majority of its debt doesn't mature within the next five years, we don't think it runs the risk of needing to refinance at current elevated rates,” assures a Morningstar equity report.

Moreover, Mondelez will continue to generate robust free cash flow (around 14% of sales annually) over the next 10 years. “Returning excess cash to shareholders will remain a priority,” says Lash, who forecasts Mondelez will increase its shareholder dividend from the current 2% to “the high-single-digit range” annually through fiscal 2032.

The global snack major’s wide moat is bult on the economies of scale gained from its expansive global footprint, with international market accounting for around 70% of revenue. “Its competitive edge is buoyed by its entrenched retail relationships, stemming from the vast resources it expends to support its portfolio of well-known brands at the shelf,” says Lash who recently ticked up the stock’s fair value to US$73 from US$70.

Food and beverage behemoth, Nestle owns popular brands such as Nestle, Nescafe, Perrier, Pure Life, and Purina. Nestle’s popular chocolate brands include KitKat, Smarties, Milkybar and Aero, among others. The firm also owns just over 20% of French cosmetics firm L'Oreal.

“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,” says a Morningstar equity report.

While the company could face competition from smaller, more nimble local rivals, Nestle’s prudent research and development, marketing, and trade spending ensure that products will always be aligned with the latest local consumer trends, the report adds.

Further, Nestle is well positioned to benefit from secular growth drivers including population growth, urbanisation, and economic growth in emerging markets, where the company sources a sizable and growing share of its sales.

Nestle’s strong multicategory, multinational presence differentiates the company from narrow- and no-moat competitors with lower scale and less entrenched channel relationships.

“Its broad and resilient product portfolio offers a diversification effect that derisks its global brand position, leading to a negligible likelihood of meaningful aggregate value destruction over a long-term horizon,” says Morningstar equity analyst Ioannis Pontikis, who recently raised the stock’s fair value to US$131 per ADR from US$113.