A Sweet Time for Hershey Stock

By ratting out its price-fixing co-conspirators, Hershey (NYSE: HSY  ) got itself a sweet deal from Canadian regulators that could see its stock pile on the gains.

According to Canada's Competition Bureau, chocolate makers Nestle and Mars, along with the wholesale distributor network ITWAL, conspired to raise prices of the confectionery going back to 2007 and earlier. One study found prices soared 38% between 2004 and 2008.

While Hershey itself was in on the plot, it cooperated with investigators and carved out a sweet deal for itself that leaves it facing just one count of price fixing and the promise of a good word being put in at sentencing. 

However, the chocolatier truly having sweet dreams is Cadbury, now a division of snack maker Mondelez International (NASDAQ: MDLZ  ) , which profited from a Canadian law that allows the first person to spill the (cocoa) beans to get lenient treatment. It laid out the plot for the regulatory agency and fully cooperated with its investigation, meaning that while the co-conspirators face fines up to $10 million and five years in jail for their role in the scheme, Cadbury wasn't charged. 

The chocolate factory
The co-conspirators might have done better had they decided to raise prices in Europe instead. According to the World Atlas of Chocolate, 16 of the top 20 countries for consumption of chocolate are on the continent, with Europeans consuming 40% of the world's chocolate -- the U.S. is only 11th on the list and Canada doesn't even rate a mention.

Yet it's easy to understand why the chocolate makers would conspire to raise prices, since it tends to be a recession-proof commodity. Like cigarettes, consumers are willing to pay almost any price for the treat.  And despite not being in the top 10 list of nations in terms of consumption, Americans still shell out $20 billion or so a year for the dark delectable.

Sugar high
For all that, however, it also shows a level of unhealthy greed among the candy makers. Privately held Mars is the largest confectionery company with $16.8 billion in total sales in 2012 followed by Mondelez at almost $15.5 billion. Hershey is sixth, with $6.5 billion in revenue. 

The global chocolate market is expected to grow at an annual compounded rate of around 3% over the next five years, according to the industry analysts at MarketsandMarkets, growing from $83.2 billion in 2010 to $98.3 billion in 2016. Hershey's revenues rose 9% in 2012 and are up another 8% over the last 12-month period. Its stock is up 34% over the past year. There was obviously plenty of money to go around for everyone without having to raise prices.

A Judas kiss
Incentivized to cooperate even if it wasn't first, Hershey got out in front of the scandal, which should enable it to concentrate on (legally) growing its market share while the others remain distracted with defending themselves. Investors just might be right to think Hershey's stock is a tempting morsel because of the sweet deal it carved out for itself.

Shares of Mondelez International fell immediately after it separated from its parent company, Kraft. Is this an indictment of the idea or a buying opportunity today? Our top consumer goods analyst will give you the scoop in our premium research report on Mondelez. Just click here now for instant access.


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