With worldwide consumer demand on the rise and revenues forecasted to reach $117.3 billion by 2018, chocolate is good business. Even with the cost of key ingredients like cocoa, milk, and nuts on the rise, it seems consumers still want chocolate, even if that means paying a little more to get it. But does this mean that chocolate companies are a good addition for your portfolio?
Betting on a big name
With roots dating back to 1894, The Hershey Company (NYSE:HSY) is one of the oldest chocolate makers in America. With notable brands like Reese's, Kit Kat, and its flagship Hershey's brand, the company reported $7.15 billion in sales last year.
Just recently, on July 24, Hershey released its second-quarter results, reporting earnings of $0.76 per share, which met analysts' consensus. Overall, sales rose 4.6% to $1.58 billion for the quarter, even though costs rose to $1.3 billion from $1.24 billion in the same quarter last year. Analysts at JPMorgan Chase (NYSE:JPM) have set a $99.00 price target on Hershey, but this is down from a previous target of $100. However, in a research note dated July 16, Morgan Stanley (NYSE:MS) set a price target of $108, up from a $101 price target set earlier.
With healthy revenue, a 46% gross margin, and a 19% operating margin, Hershey appears to be in a strong position. The stock also offers a dividend with a 2.06% yield, making it a very attractive option for anyone seeking a little income from their investments.
A retail play
While Hershey sells what it makes wholesale, Rocky Mountain Chocolate Factory (NASDAQ:RMCF) sells what it manufactures direct to consumers via its 365 franchised and company-owned retail stores. Rocky Mountain Chocolate released its first-quarter earnings on July 15, reporting a decline in sales that it attributed to several harsh winter storms and a soft retail environment. Adjusted EPS was $0.14, down from $0.19 in the first quarter of 2014, and the company missed the consensus estimate of $0.24.
While this is disappointing news, retail sales did rise 4.6%, and with margins similar to those of Hershey and a dividend with a 3.38% yield, Rocky Mountain Chocolate Factory begins to look more attractive. The board of directors has also approved a three million share buyback, which should give shares a boost as well.
A broader snack play
If Hershey and Rocky Mountain Chocolate Factory are a little too niche for your tastes, consider Mondelez International (NASDAQ:MDLZ). Mondelez is the parent company behind venerable chocolate brands like Toblerone and Cadbury, but its operations are diversified into many other well-known snack brands as well, including Oreo, Chips Ahoy, and Triscuit.
In recent months, several analysts have set price targets ranging from $36 to $40 per share. In early May, backed by a positive earnings announcement, shares of Mondelez shattered the low end of that target but have not yet reached $40, leaving some potential upside in its share price. However, for long-term investors, we must question what happens once Mondelez hits the $40 mark.
Overall, with reasonable debt and margins just a little smaller than those of Hershey and Rocky Mountain Chocolate Factory, Mondelez fundamentals look good. And Mondelez does offer a dividend with a 1.46% yield, which is definitely an attractive bonus and helps give investors some incentive, even if share prices were to stall around the $40 price target.
Chocolate seems to be a luxury many are willing to splurge on, even when prices rise and economic conditions are not favorable. Even at the height of the economic fallout from the 2008 financial crisis, nearly 185,000 tons of chocolate was sold in the U.S. alone. Chocolate has long been viewed as a recession-proof industry, and with Hershey, Rocky Mountain Chocolate Factory, and Mondelez all continuing to perform well in a tough consumer market, any one of these companies seems worthy of serious consideration.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in RMCF over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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