The Sweetest Investment of Them All

Investing in companies that target the health-conscious consumer is likely to be profitable over the long haul. At the same time, this doesn't mean you should avoid companies that focus on candies and snacks. Despite the rise of the health-conscious consumer, there are still plenty of people who aim for the immediate satisfaction of their taste buds.

Additionally, some confectionery companies are beginning to find innovative ways to target the health-conscious consumer. Hershey (NYSE: HSY  ) is one of those companies. However, this is only a small part of the company's long-term plan. We'll take a look at what Hershey has in store, and if it's likely to outperform Mondelez International (NASDAQ: MDLZ  ) and Tootsie Roll (NYSE: TR  ) over the next several years. 

A confident company
Hershey is well aware of what's taking place in the current economic environment, with the hesitant consumer as a focal point. However, Hershey doesn't plan on slowing down. It expects its strong momentum to continue throughout the remainder of the year, and for net sales growth to be driven by increased advertising, strategic merchandising, and brand building in domestic and international markets. Hershey expects 7% sales growth for fiscal year 2013 (including foreign currency exchange rates). Core brand volume growth will be the key contributor.

More innovative than you think
When you think of Hershey, it's not likely that you think of innovation. That's because there's so much focus on technological innovation at the moment. In order for a company to show sustainable growth, it must innovate, and that's why Hershey has been a long-term success.

In international markets, Hershey is extending its brand portfolio with Hershey's Kisses Deluxe, Hershey's Drops, instant consumable packs, and take-home packs. Domestically, the company's brand portfolio is being extended with new innovative treats that include Kit-Kat minis, Twizzler Bites, and Jolly Rancher Bites. The acquisition and launch of Brookside (which makes chocolate-covered fruit juice pieces/antioxidants to target the health-conscious consumer) is likely to play a role as well, and this role is likely to grow down the road.

Long-term thinking
Looking to FY 2014 and beyond, Hershey aims for growth via innovation, acquisitions, and mergers, as well as geographic and product expansion. Thanks to an established and proven-to-be-effective business model, Hershey can make somewhat accurate predictions about future results. Hershey expects long-term earnings-per-share growth of 9%-11%. In FY 2014, it expects double-digit international sales growth. 

Some products that are likely to help drive sales in the future include Lancaster soft cremes, York Minis, Hershey's Spreads.

Overall, Hershey has established a strong international presence, with its brands broadly accepted and loved. Now let's see if Mondelez and/or Tootsie Roll might present even more enticing investment opportunities.

Three companies heading in different directions
Prior to analyzing current and likely future trends, let's first take a look at a top-line performance comparison for Hershey, Mondelez, and Tootsie Roll over the past year:

TR Revenue (TTM) Chart

TR Revenue (TTM) data by YCharts

While all three companies have made recent improvements on their bottom lines, Hershey has been the most consistent, primarily thanks to cost management and operational optimization:

TR EPS Diluted (TTM) Chart

TR EPS Diluted (TTM) data by YCharts

Mondelez is an intriguing story due to the recent Kraft spin-off. On one hand, Mondelez delivered $35 billion in revenue in FY 2012, which stems from worldwide demand for the company's popular brands that include Cadbury, Nabisco, Oreo, Tang, and Trident. On the other hand, Mondelez is just getting used to operating on its own.

Like Hershey, Mondelez is expanding its geographic footprint, which makes sense given its iconic brands. Since 2009, Mondelez has seen annual global growth of 6% in the biscuits and chocolate categories, 5% annual growth in gum/candy, 10% annual growth in coffee, and 7% annual growth in powdered beverages.

Mondelez plans on using its available cash to help drive growth and to use its cash flow to reward shareholders. Mondelez has $3.92 billion in cash and it generated $2.95 billion in operating cash flow over the past year. However, it also has $19.96 billion in long-term debt, which could impede growth potential if and when interest rates increase.

Mondelez expects Oreo and Bubbly chocolate to drive the top-line, and it aims for strict capital management to aid the bottom line.

Tootsie Roll, best known for its namesake brand, Fruit Rolls, Blow Pop, Dots, Double Bubble, and Junior Mints, has been around for 116 years. It sells its brands at high volumes for retailers and at low costs for consumers. Tootsie Roll aims for effective marketing and selling programs to drive the top line. While this strategy has made sense in the past, Tootsie Roll seems to need either more innovation on existing products, or new products. The top line has suffered due to reduced demand.

Tootsie Roll is expanding its dollar-store offerings throughout Canada, and Christmas is the biggest candy season in Mexico. Therefore, near-term potential exists. However, in addition to the reduced demand for Tootsie Roll brands, 23.5% of its sales come from Wal-Mart. This is a positive, but it's also a concern. Though highly unlikely, if any problem was to arise with this arrangement it would be a major negative. What's more concerning is Tootsie Roll's high sensitivity to volatile commodity costs.

All three of the aforementioned companies pay dividends. Hershey yields 2%, Mondelez yields 1.70%, and Tootsie Roll yields 1%.

The bottom line
Hershey is outperforming its peers on the top and bottom lines, primarily thanks to an established business plan that has led to consistent results. Continuous high demand for core brands as well as consistent innovations to help drive growth don't hurt, either. Mondelez is also a strong company with solid long-term potential, but it's not quite as impressive as Hershey. 

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Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 03, 2013, at 10:12 AM, prginww wrote:

    Hershey is a big growth story. The company gets only about 20% of its revenues from overseas, but wants to grow its international operations to 25% of its business by 2017. It opened an Asia Innovation Center in Shanghai in mid-2013 and recently announced plans to build a $250 million confectionery manufacturing plant in Malaysia, which is in the heart of the cocoa growing region. Hershey already owns the largest share of chocolate confectionery business in North America. I started buying this stock at 58 per share a few years ago and most recently paid $89 per share. Hershey replaced my Wrigley stock, which was purchased by Mars in 2009. I made 10% to 15% annually from Wrigley for 10 years. Hershey is doing just as well if not better. I plan to hold and possibly buy more HSY.

  • Report this Comment On December 03, 2013, at 3:18 PM, prginww wrote:

    Hi Dan,

    I'm a grandson of H.B. Reese, the founder and Chairman of the Board of the H.B. Reese Candy Company which merged in a tax free stock-for-stock merger with Hershey Chocolate Corporation on July 2, 1963 (SEVEN years after the death of H.B. Reese, my Dad was his youngest son, Charles Richard Reese).

    I find it amazing that you did NOT MENTION A PEEP about Hershey's most financially successful brand, Reese's.

    The joke among Wall Street investment bankers is that The Hershey Company is NOTHING MORE than the H.B. Reese Candy Company doing business as (DBA) The Hershey Company.

    According to Advertising Age and Euromonitor International, the Reese's Brand was the #1 ranked candy brand in the United States with 2012 sales of $2.603 BILLION. Reese's was the #4 ranked candy brand globally with 2012 sales of $2.679 BILLION. That's right, Reese's was ranked #4 globally with just a mere $76 million of its sales OUTSIDE the United States.

    The Hershey's Brand did NOT even make the Advertising Age/Euromonitor International list as a top candy brand either globally or even in the United States.

    Furthermore, the non-union H.B. Reese Candy Company manufactures the Kit Kat for the U.S. market, Kit Kat had 2012 U.S. sales of $948 million making it the #4 ranked candy brand in the United States according to Advertising Age and Euromonitor International.

    Over the past 50-years, the H.B. Reese Candy Company has created most of the new wealth for Hershey's shareholders.

    And it will do so in the future too, even if The Hershey Company continues to REFUSE to market and/or promote the Reese's Brand internationally.

    Here's a good analogy, the Milton Hershey School Trust continues to sell Hershey common shares in an ongoing effort to diversify its investment portfolio. But heck that PESKY Hershey stock keeps going up in value (because of the success of the H.B. Reese Candy Company) so that in reality, the VALUE of the Hershey Trust portfolio is still overweighted in Hershey stock.

    Well that analogy perfectly fits the H.B. Reese Candy Company. The Hershey Company will continue to internationally market and promote brands OTHER than the Reese's Brand, but it will be the ongoing success of the Reese's Brand in the United States that will FINANCE THE INVESTMENTS in Hershey's international markets and it will be the Reese's Brand in the United States that will continue to create all the NEW WEALTH for Hershey shareholders.


    Brad Reese

  • Report this Comment On April 03, 2014, at 1:31 PM, prginww wrote:

    Mr Reese

    In your opinion why is Hershey not marketing the Reese's brand outside of the U.S. if it such a huge driver of sales and income? There must be another reason other than diversifying its sales.

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