May 222015
 

Those who invest in cocoa should put their money behind bars. Chocolate bars that is! 😀 Earlier this week in part 1 of my investing in chocolate series I wrote about the insatiable global appetite for chocolate and how to make money from that. 🙂 Today I’ll go into details about how I plan to do it.

Last week I purchased about $4,000 USD of chocolate companies, Hershey Co and Mondelez International Inc. 😀 Both are major players in the chocolate space and own some very high quality products and valuable brands. I bought 20 shares of HSY and 50 shares of MDLZ, which is roughly $2,000 of each company.

15-05-hershey-mondelez-stock-purchase

As we can see I bought these 2 stocks in my US dollar TFSA for efficiency. I’ll post a tutorial on how to open a registered $USD account in the future if anyone’s interested. For now let’s go over some analysis to understand why I believe these companies should be in my long term investment portfolio.

The Hershey Company

Famous investor Warren Buffett said one of the secret formulas to a successful business is to “buy commodities, and sell brands.” That is exactly what Hershey is doing. 🙂 It purchases sugar, milk, cocoa, etc, and sells products that have major brand recognition. About half of the chocolate consumed in America is milk chocolate, and that is what Hershey is known for. 🙂 If someone goes into a candy store to buy a Hershey chocolate bar and the store owner says “sorry, we don’t have Hershey, but we have this other generic brand that is 20% cheaper,” then the customer will probably leave and try to find another store to get his Hershey fix. 😆 That is the power of brand loyalty. It automatically puts a 20% value premium over other businesses offering the same food. Check out some of the awesome brands Hershey is responsible for.

15-05-hersheys-brands

Hershey’s global reach is surprisingly wide, and Forbes has ranked the Hershey brand 5th overall. Hershey is America’s largest chocolate producer with 43% of the U.S. chocolate market. It sells products in over 2 million retail outlets in 50 different countries under 60 brand names and growing. 😀 Most of its sales come from the U.S.

One of the metrics I at when analyzing a stock is its earnings growth and sales growth, in other words, the bottom line and revenue trends. So let’s take a look at its financials. Revenue = total sales. Earnings = after tax profit.

YearRevenue ( billions)Earnings Per Share (EPS)
2010$5.7$2.57
2011$6.1$2.91
2013$6.6$3.17
2013$7.1$3.76
2014$7.4$3.95
2015??????

The 5 year earnings and revenue growth looks pretty healthy to me. 🙂 Each year the company sells more products and makes a larger profit than the year before. That’s the sign of a good investment. The current EPS of Hershey is about $4. The stock is trading at roughly $94 today. If we divide the stock price by the EPS we get the P/E ratio of 23.5 times. The lower this number is the more undervalued the stock is. Historically speaking 23.5x is a decent valuation for Hershey. Here is the PE ratio of the stock over the last 5 years. If the PE ratio is currently over 30x then I would be hesitant to buy. If the PE ratio is too high there will be the risk of PE compression which will lower the price of a stock.

15-05-hersheys-pe-ratio

With an expected profit of $4 per share I should make $80/year on this investment with my 20 shares of HSY. That’s better than leaving money in a savings account. 🙂

Another factor I look at is how many institutional investors have stakes in the investment. For Hershey about 3/4 of the shares are held by pension funds, sovereign wealth funds, and other large institutions so I’m more confident in holding HSY for a long time.

The final variable I look at is the analyst’s recommendations. According to Thomson Reuters there are 15 stock analysts who have opinions about HSY. Most of them give Hershey a “hold” rating, but there are a few positive sentiments as well. Ideally I would have liked to see more optimism from analysts on HSY. At the moment it appears Wall St. doesn’t see a lot of future growth with HSY, but at least there is no “sell” recommendation. Other than this neutral outlook, I still believe Hershey is a good stock to buy and hold because of the other positive signals I’ve mentioned.

Mondelēz International Inc

Mondelez (MDLZ) is an North American multinational confectionery, food and beverage conglomerate, employing around 107,000 people around the world. The stock is a bit overvalued at 29 times PE ratio but I think its a good complimentary investment to hold alongside my HSY shares because Mondelez has 44% of its business in emerging markets. There’s a lot of opportunities in the growing consumer middle class of Asian, South American, and Eastern European households. Mondelez is 3 times larger than Hershey by market cap. It is one of the top players in biscuits, candy, gum, and of course, chocolate. 😀 Most of those categories have very little private label competition, which is good for pricing. Here are some notable Mondelez brands.

15-05-modelez-brands

As a kid I used to see commercials for many of these products on the telly. Little did I know back then they were all from the same company! 😛

I have some mixed feelings about the financials of Mondelez. It’s sales look to be stalled over the last few years but the earnings growth is quite respectable.

YearRevenue ( billions)Earnings Per Share (EPS)
2010$31.5$0.53
2011$35.8$1.29
2013$35.0$1.58
2013$35.3$1.77
2014$34.2$2.15
2015??????

Most analysts do seem to like Mondelez. It’s also a good sign that it has surprised the market with better than expected business numbers for the last 5 consecutive quarters of financial reporting. 🙂

15-05-mondelez-chocolate-analysts

Risks

Investing in chocolate companies comes with risks just like any other venture. Input costs such as cocoa, milk, sugar, and nuts are volatile and can make it more expensive for these companies to make their products. Here’s the price of cocoa over the last 25 years. The large swings show this commodity is not for the faint of heart. 😕

15-05-coco-price-commodity

This volatility is influenced by factors such as weather conditions, pests/disease, speculation and political instability. Luckily large chocolate producers like Hershey and Mondelez have the purchasing power to hedge against price instability and also pass the increased cost of production to consumers in the form of higher prices. It may leave a bitter after-taste with chocolate lovers but it’s a winning business strategy. Hershey has been raising its wholesale prices over the years as the ingredient it buys become more expensive. #foodinflation.

The Last Bite

A few large players in the growing chocolate market means sweet times ahead for investors in those companies. 🙂 With global chocolate confectionery sales growing each year I look forward to mouthwatering returns from my 2 new stock purchases. 😀

—————————————————————-
Random Useless Fact:

In 100 years Google Maps will have a street view feature called “retro” that will show what towns looked like in 2015

30
Leave a Reply

avatar
18 Comment threads
12 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
9 Comment authors
OPM - Other People's Moneythe importance of knowing what Not to dofreedom 35Dividend DiplomatsPC Recent comment authors
  Subscribe  
Notify of
RICARDO
Guest
RICARDO

Hi 35;
Far be for I, especially as a chocholic, to question your tastes.
However I do wonder why you would put these is your TFSA. As far as I know you will be subject to withholding tax and seeing it is in the TFSA you will not be able to claim that tax on your income tax filing?????

Kapitalust
Guest

The RRSP would be the best spot (if you have to choose between a rock and a hard place) for US dividend paying stocks as there is no tax (Canadian or US) on the dividend or capital gains as you grow your investments (of course there is tax to pay when you withdraw the money in retirement).

In a regular trading account (non-TFSA/RRSP), you could recover the 15% foreign withholding tax through the foreign tax credit, HOWEVER you still have to pay tax on the dividend to the Canadian government (~15%). You also get the benefit of tax lose credits if your investment tanks and you sell out your position, which can be used to lower taxes on other capital gains.

In a TFSA, you don’t need to pay tax to the Canadian government on the dividend but the US government withholds 15%, which is not recoverable. And you lose the benefit of the tax lose credits – if your position goes to zero, you get no tax lose credits.

In conclusion, this timeless maxim holds true: “nothing in life is certain except Death and Taxes.”

Kapitalust
Guest

Oops should revise that if you hold US dividend paying stocks in a regular, non-registered (non TFSA/RRSP) you can recover the 15% foreign withholding tax through the foreign tax credit BUT you’ll pay tax on those dividends to the Canadian government at your FULL MARGINAL TAX RATE (ouch).

Kapitalust
Guest

What makes HSY so interesting is that there are 2 classes of stock: the common stock (which anyone can buy) and the B class stocks. The common shares have negligible voting rights – the B class shares hold the vast majority of the voting rights. Almost all of the B shares are owned by the Hershey Trust Company, the trustee for the benefit of the Milton Hershey School. The Milton Hershey School was established by the founder of the Hershey Company (Milton Hershey) and Milton donated his entire Hershey fortune to the establishment of the Hershey Trust to benefit the Milton Hershey School. The Milton Hershey School is one of the best private academies in the world and it is set up for the benefit of disadvantaged children (who apply and if accepted get a full ride through the institution). The Hershey Trust operates for the benefit of running the Milton Hershey School, so they need the Hershey Company to keep on producing profits to fund the school. Since the Hershey Trust essentially controls the voting power of the Hershey Company, the interests of the Trust (more and more profits for the school) align with the non-voting shareholders (who also… Read more »

RICARDO
Guest
RICARDO

That is what I thought as well Kap. Even in an RRSP certain types of shares will get taxed, such as US MLPs and foreign stocks listed on a US exchange. I know, it happened to me.

Kapitalust
Guest

Ya, one really needs to know the ins and outs of what is taxable and what isn’t across all the unregistered and registered accounts if one is inclined to try and maximize tax efficiency. For most people, just saving and putting away money every month into index funds, first into their RRSPs and TFSAs then unregistered, will be enough.

However, people like us enjoy torturing ourselves by going through the small print to find out maximum efficiency 😀

RICARDO
Guest
RICARDO

Hi Cap;
Very interesting about Hershey’s. Nice to know that the profits are also benefiting people at the lower end of the pay scale.
Another “Charitable Foundation” is Robert Bosch. All those home appliances, hand tools, automotive products, etc
From Wikipedia
“Robert Bosch GmbH is privately owned, and 92% of its share capital is held by Robert Bosch Stiftung GmbH, a charitable foundation.[4] The majority of voting rights are held by Robert Bosch Industrietreuhand KG, an industrial trust.[4] The remaining shares are held by the Bosch family and by Robert Bosch GmbH”

RICARDO
Guest
RICARDO

The “ouch” should be in larger print, bold, highlighted. LOL

beth
Guest
beth

I do not care for the taste of chocolate so I will not help increase the profits of your companies.

RICARDO
Guest
RICARDO

@Beth
I don’t smoke but I still like the smell of a cigar or pipe.
I don’t drink coffee but I like the smell of a fresh brewed cuppa.
Not liking chocolate is a reason butnot a very good one to not consider the validity of a company.
Mind you, I would not buy them either but for different reasons even though i am a chocoholic.

RICARDO

trackback

[…] Hersheys and Mondelez; Investing in Chocolate – Part 2 by Freedom Thirty Five […]

Lynx
Guest
Lynx

Hello Liquid,

I like both of your picks in the chocolate space. Mondelez I encountered not to recently on an asset management focus list I have privy to but never explored further since I found the yield low. I may have to revisit though if they have some brand dominating growth prospects.

Sweet investing,

Lynx

trackback

[…] discussion on tax efficiency in the comments section over at Freedom 35’s blog (yes, riveting stuff) has spilled over here: where, oh where, to put US dividend paying stocks for […]

Tawcan
Guest

I really like both of these purchases. Mrs. T happens to be a big chocolate lover so I know how people feel about chocolates. 🙂

BeSmartRich
Guest

As always, I really like your purchase. Your purchasing decision is always unorthodox but have been providing solid results so far. The purchase goes very well with your witty writing style. Keep up the great work!

BeSmartRich

PC
Guest

I’ve been eyeing $MDLZ for a while since they’re the makers of Oreo. I’ve sold puts around $34-35 and got some premiums but then it jumped to $40/share. But I should follow your lead and own the stock rather than sitting on the sidelines. I’ve sold out $SBUX for over 200% gain while you bought into it around that time. I should practice more patience like you, non-Liquid. 😉

Dividend Diplomats
Guest

I like your analyses. Hershey’s is right up my alley because I love strong consumer brands. While their yield is a little lower than I typically like, their double digit dividend growth makes up for it. I’ll be adding this stock to my watch list ,especially if the stock price continues to retreat. Thank you for putting this article and the analyses of the two companies together!

Bert

trackback

[…] Sell in May and go away. It’s typical for stock markets to fall in May and that’s exactly what happened this year in Canada. Since stocks make up a quarter of my net worth, a 2% decline to the TSX Composite translates into thousands of dollars of paper loss for my investment portfolio. Normally this would be a month when my net worth would drop. But luckily I was paid $4,500 of rent in May. The next time my tenant pays me again will be in October. I also received a small tax return which was nice.  When assets are worth less, it’s nice to have some extra sources of income to make up the gap. I used the extra money this month to invest in chocolate. […]

Kapitalust
Guest

Been loading up anymore HSY on the current dip?

trackback

[…] as important as deciding what to do. If investing in profitable companies such as Cineplex, and Mondelez is how I’m generating profits each year, then not buying lousy investments is how I’m […]

trackback

[…] Hershey and Mondelez – Bought $2,000 of each stock in May. Hershey is down 6% so far. Valuation was too high! But Mondelez has since returned 11%. Treat yo self! […]