Why Hershey Will Win the Candy Bar War

Halloween is still over a week away, but things have already been heating up out in candy land.

According to the National Confectioners Association, Americans spent more than $12.6 billion in 2012 — 4% higher than the year before. And around Halloween, 72% of all candy spending will be on chocolate.

That should make all three of the big candy bar companies — Nestle (NSRGY), Hershey (HSY) and Mars — very happy. Hershey and Mars possess 18 out of the 20 best-selling chocolate brands, amounting to 88% market share. Meanwhile, Nestle’s Butterfinger and Crunch brands fill out the mix.

Like many industries in the U.S., an oligopoly definitely exists in the world of candy.

But the market leaders aren’t sitting still. Instead, all three big candy companies have recently introduced new brands or product line extensions, ratcheting up the competition. Heck, Nestle is even running a Super Bowl ad this year — its first ever — in support of its new Butterfinger Peanut Butter Cups.

Let’s take a closer look at who’s doing what … and figure out if there are any investment opportunities worth considering.

What’s New in Candy Land

Hershey already boasts the top-selling chocolate confectionery brand in the U.S. — the Reese’s Peanut Butter Cup, which is projected to do more than $2 billion in 2013 revenue. Now, Hershey is introducing Lancaster, its first new candy in 30 years.

The names comes from The Lancaster Caramel Co. — Milton Hershey’s first candy business. Lancaster will come three flavors to start: caramel, vanilla and caramel, and vanilla and raspberry. Already available in a few cities in China, the candies will hit U.S. stores in the new year and should play an important role in the company’s goal to hit $10 billion in global revenue by 2017.

While it’s not introducing any new candy brands for 2014, Mars is bringing nine product extensions to the confectionery marketplace. Brands getting additional firepower include M&Ms, Twix, 3 Musketeers, Milky Way, Dove and Snickers. Originally introduced as a limited edition item in 2008, Snickers’ Rockin’ Nut Road Bar will gain permanent entry into the Mars chocolate lineup.

An interesting fact: Mars research indicates that in the U.S. only 10% of the time do guests at parties bring chocolate as a gift vs. 46% in the U.K. Starting with Super Bowl ads, Mars looks to promote chocolate as an appropriate gift at parties.

Finally, Nestle is introducing its own version of the peanut butter cup … as mentioned in the opening. The new version will be square to stand out from Hershey’s traditional circle.

What It Means

Does Butterfinger stand a chance? Sure, although nobody expects Nestle to hit a home run given Reese’s market-share (11.5% for Reese’s vs. 1.9% for Butterfinger) and ad-spend ($82.2 million annually for Reese’s vs. $18 million for Butterfinger) superiority.

The wildcard here is what will happen in the future, though. If you follow Nestle closely, you know the food giant is looking to unload underperforming brands. While its chocolate business accounts for just 9.2% of overall revenue and could be vulnerable to divestiture, rumors abound it wants to buy Italy’s Ferrero Rocher, makers of Nutella, Tic Tac, Kinder and Ferrero Rocher.

Additionally, its doubling of annual ad spending for Butterfinger is an indication management are happy with the segment’s performance.

For Mars, top brands are experiencing declining revenues. But Hershey’s seem to be picking up with Kit Kat increasing an especially robust 22% in the last year to more than $300 million. Plus, second-quarter adjusted earnings for HSY increased 9% to 72 cents on good top-line growth along with solid margins.

Hershey also gained 1.4% market share in the quarter and upped its fiscal 2013 revenue guidance to 7% growth from 5% and adjusted earnings to at least $3.68 per share, an increase of 14% year-over-year and two percentage points higher than original projections.

Best of all for income investors, it boosted its quarterly dividend by 15.5% to 48.5 cents. Despite a lofty valuation, Hershey still yields over 2%, which isn’t too bad when you consider its stock’s total return over the past five year’s has averaged 24.5% on an annualized basis — 7.5 percentage points higher than the S&P 500.

Snack on Hershey Stock

Although Hershey stock is trading perilously close to an all-time high, I’m not afraid to recommend buying its stock with the proviso you keep some dry powder for significant market corrections of 5% or more.

Since 1945, there have been 46 corrections of 5% to 10%, which works out to an average of one every 18 months. The most recent — May/June — saw the S&P 500 decline by nearly 6%. The one prior in the fall of 2012 declined by almost 8%. I would bet my left arm there will be at least one more between now and the November 2014 election.

If you’re betting on the candy wars you have no option but to go with Hershey. Mars is private, Nestle is in the midst of a complete overhaul, the Mondelez (MDLZ) chocolate and candy business is barely growing and Tootsie Roll (TR) has already seen its stock appreciate greatly because of the ongoing speculation its aging owners are going to sell out.

An alternative for those concerned about Hershey’s valuation is to buy the PowerShares Dynamic Food & Beverage Portfolio (PBJ), an ETF with 30 food and beverage companies including Hershey and Tootsie Roll at weightings of 5.03% and 2.8% respectively.

But in the long-run, Hershey still looks like it could be a delicious investment if you find the right entry point.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities. 

Article printed from InvestorPlace Media, https://investorplace.com/2013/10/buy-hershey-stock/.

©2022 InvestorPlace Media, LLC