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 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 and Tootsie Roll 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) 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) 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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