When it comes to investing in big, publicly owned candy companies, investors don't have a lot of options to choose from. The giants of the industry, including Mars, Kraft -- now Mondelez International (NASDAQ: MDLZ) -- and even Berkshire Hathaway, have gobbled up most of the small fries, absorbing once-famed small-batch brands into the conglomerate that is Big Candy.
Probably the best-known, still-independent candy concern out there that's still investable is Hershey (NYSE:HSY). But is Hershey stock worth investing in? Let's find out. We'll start off with a couple of predictions from the professionals on Wall Street, and then I'll give you a prediction of my own.
Prediction No. 1: So-so sales
Wall Street analysts see Hershey growing its sales by about 23% over the next five years. That's roughly equal to the projections for industry giant Mondelez, at 23%, but it's also a bit surprising. Mondelez's annual sales are already more than five times bigger than Hershey's -- $35 billion, versus only $6.6 billion.
Ordinarily, you'd expect Mondelez to be running into the "law of large numbers" right about now and struggling to outgrow smaller Hershey, which presumably has more room to grow. But it's not. It's actually expected to outperform Hershey slightly in the growth race.
At the same time, tiny Tootsie Roll (NYSE: TR) may see its sales grow as little as 13% through 2016. Could it be that in the candy industry, bigger is better? Does Hershey lack the scale to compete effectively against mammoth Mondelez?
Prediction No. 2: Smarter earnings
Or is Hershey just growing smarter than Mondelez? A chart of how these three candy companies' earnings are expected to perform in coming years suggests this possibility -- because even if Mondelez grows sales growth faster than Hershey does in future years, analysts expect Hershey stock to be far and away the faster grower of profits.
On average, the consensus of analyst estimates says that Hershey's earnings will rise 68% over the next five years, while Mondelez settles for 39% growth, and little Tootsie Roll ekes out a living on just 15% growth.
Prediction No. 3: All good things must come to an end
Those are some pretty big earnings that analysts are expecting from Hershey -- but they don't hold a candle to what Hershey stock has delivered in the past. Over the past five years, this company has delivered compounded annual earnings growth of more than 30% -- versus low-single-digit gains at both Mondelez and Tootsie Roll.
It's performance like this that has analysts thinking the good times will continue for Hershey, and it has investors anteing up nearly 29 times earnings for Hershey stock. And that would be fine if Hershey's earnings kept on growing at 30%. But for most companies, that's awfully hard to do -- and even Hershey's strong expected earnings growth over the next five years doesn't add up to 30% future annual gains. It's actually closer to 11%.
This is why, despite all the good Hershey's done so far for its investors, despite its strong earnings of years past, and its prospects for continued growth in years future, I just don't believe Hershey stock can hold on to its high valuation of today. Paying 29 times earnings for 11% growth at a food company simply isn't rational. Hershey stock must fall.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.