Chocolate is a big business, and I don't mean just for your waistline! According to the International Cocoa Organization, the global chocolate confectionery retail market nearly doubled from $52 billion in sales in 2002 to $102 billion by 2011. To put this into perspective, the industry has grown at a 7.8% annualized return. But, when Hershey (NYSE:HSY) reports earnings on Thursday, Jan. 30, will it show that it's keeping pace with the industry or will it disappoint?
Mr. Market has high expectations!
For Hershey's fourth quarter, analysts expect a lot out of the company. If forecasts turn out to be right, the company should report revenue for the quarter of approximately $1.9 billion, about 8% higher than the $1.7 billion the company reported the same quarter a year earlier. In the event that Hershey does meet analyst expectations, the company's revenue for the 2013 year will have risen 6.8% from $6.6 billion to $7.1 billion.
On an earnings-per-share basis, Mr. Market demands even more. For the quarter, analysts expect the chocolate company to clock in earnings of $0.86, 16.2% above the $0.74 Hershey saw in the fourth quarter of 2012. Looking at the situation from a full-year basis, Hershey's earnings per share will likely come in at $3.72, 14.8% higher than the $3.24 the company reported for 2012.
But does Hershey have what it takes?
For the past few years, Hershey has grown at a reasonable clip. Between 2010 and 2012, revenue (inclusive of the company's non-chocolate products) grew 17.2% from approximately $5.7 billion to $6.6 billion. In 2012, 83.9% of these sales were derived from the U.S., where Hershey holds a 43% market share. With the U.S. being a mature market for chocolate and comprising more than 63% of the global confectionery market, the company has turned its efforts to growing internationally.
While U.S. sales grew at a rate of 15.1% between 2010 and 2012, Hershey's international sales nearly doubled that rate of growth at 29.1%. But, with only about $1.1 billion in sales outside of the U.S., the company has a long way to go before it can catch up to rival Mondelez International (NASDAQ:MDLZ).
As of 2012, Mondelez posted consolidated revenue of $35 billion. Looking at the company's sales of chocolate, gum and candy, and beverages, though, we see that its revenue came out to $20.5 billion. Of this revenue, 92.1% (or $18.9 billion) came from sales outside of the U.S. This is all very impressive, but how does the company stack up against Hershey in terms of profitability?
Between 2010 and 2012, Hershey's bottom line rose an impressive 29.6% from $509.8 million to $660.9 million. In many cases, companies growing businesses enjoy what's called economies of scale. What this means is that as they grow, they are able to use their improved level of efficiency and market presence to keep costs down.
During the past three years, Hershey did demonstrate some mild improvement in its cost of goods sold, which fell from 57.4% of sales to 57%, but this was offset by a 0.4% rise in the company's selling, general, and administrative expenses. In fact, when analyzing the company's income statement, the main reason for the disparity between its revenue growth and net income growth was lower impairment charges relative to sales, not lower operational expenses.
In juxtaposition, Mondelez saw revenue rise by 11.2% between 2010 and 2012, but its net income fell 26.4%. Just as in the case of Hershey, the reason has less to do with operational issues and more to do with one-time events. Over this period, Mondelez did see some improvement in its selling, general, and administrative expenses, which fell from 29% of sales to 26.2%, but the company was hit hard by a decline in its gains from discontinued operations.
As opposed to the $3.5 billion that management booked as a gain in 2010, it only reported $1.5 billion in 2012. After adjusting for these one-time gains, the business saw its bottom line rise 144.5%, far more than the 22.7% rise Hershey reported.
Heading into earnings, Mr. Market has high expectations for Hershey. Historically, the business has been successful in growing, but its earnings have been bolstered by one-time expenses. Adjusting for these expenses for both companies, Mondelez comes out on top in bottom-line improvement, but Hershey's revenue growth is certainly enviable.
Moving forward, the trick for the Foolish investor will be to decide which company offers the best long-term value. Given its size, Hershey has the ability to grow more than Mondelez and has been successful in proving this. Furthermore, with a three-year average operating margin of 16.7% compared to the 9.4% margin reported by Mondelez, the company operates more efficiently than its larger rival. For any long-term investor, that kind of value proposition is difficult to pass up.