The confectioner is popular with gurus as of the 2nd quarter
Summary
- The stock was held by 21 gurus, compared with 11 for Hershey and five for Tootsie Roll.
- Is there something that sets the company apart?
As the spookiest night of the year quickly approaches, investors may be taking a closer look at companies that profit from Halloween-related activities.
The National Retail Federation’s annual survey projects total Halloween spending, which covers the costs of candy, costumes, decorations and even greeting cards, will reach a record $12.20 billion this year, which is up from $10.60 billion in 2022 even as the economy continues to battle elevated inflation and high interest rates. Celebrants of the autumn holiday are expected to spend an average of $108.24 each this year getting in the spirit, up from 2021’s record of $102.74.
As children and adults alike dress up and go trick-or-treating for sweets and other treats, confectioners are among the companies that will benefit most. The NRF survey reported that consumers will spend an estimated $3.60 billion on candy alone this year.
The GuruFocus Aggregated Portfolio, a Premium feature based on 13F and NPORT-P filings, found popular candy companies among gurus as of the end of the second quarter were Mondelez International
MDLZ
Inc. (MDLZ, Financial), The Hershey Co. (HSY, Financial) and Tootsie Roll Industries Inc. (TR, Financial).
However, of the three companies, Mondelez appears to be the most popular by a wide margin, being held by 21 gurus with a combined equity portfolio weight of 7.04%. In comparison, Hershey is owned by 11 investors and Tootsie Roll was held in five portfolios as of June 30.
Is there something about this confectioner that makes it stand apart from the others?
About Mondelez
Established in 2012 on the foundations of several legacy predecessor companies, the Deerfield, Illinois-based confectioner is known for its Cadbury, Milka, Toblerone and Sour Patch Kids candy products, as well as Oreo and Chips Ahoy cookies.
Mondelez operates through five segments, the largest of which, Biscuits and Baked Snacks, contributed nearly half of its revenue in 2022. In comparison, its Chocolate and Gum and Candy businesses generated around 30% and 10% of sales for the same period.
Financial review
In July, Mondelez reported its second-quarter financial results.
For the three months ended June 30, the company posted adjusted earnings of 76 cents per share on $8.51 billion in revenue. Net income totaled $944 million and Ebitda came in at $1.60 billion. All four numbers were up from the prior-year quarter.
In a statement, Chairman and CEO Dirk Van de Put commented on the company’s performance, which “demonstrate broad-based strength” across its business.
“Continuous reinvestment in our brands and capabilities, combined with ongoing price execution, cost discipline and strong volume/mix performance drove these results,” he said. “We continue to drive robust consumer demand in our core categories across the vast majority of our businesses, and our teams continue to make significant progress against our portfolio reshaping initiatives as we remain focused on accelerating strong, sustainable growth.”
Looking ahead to the full year, Mondelez upped its expectations to 12% growth for both net revenue and earnings per share. Both were 10% previously. The company is scheduled to report its third-quarter results after the closing bell on Nov. 1.
Since Hershey and Tootsie Roll also reported good results for both the second and third quarters, earnings results are likely not what is setting Mondelez apart.
What about margins?
Since earnings did not provide concrete answers, it may be beneficial to take a closer look at margins as they are a good way to gauge profitability.
Although Mondelez has recorded multiyear declines in its operating and gross margins, GuruFocus says they are still outperforming over 70% of competitors. Hershey’s also has strong margins, which have been expanding over the past several years. Tootsie Roll has good operating margin growth, but has seen a recent decline in its gross margin. Regardless, it, too, is outperforming versus industry peers according to GuruFocus data.
MDLZ Data by GuruFocus
Therefore, while margins may be a factor, they are likely a negligible one.
Dividend dissection
There is also the company’s dividend to consider. Mondelez pays a quarterly dividend, which was recently increased to 42 cents. It also has a trailing dividend yield of 2.42% and a payout ratio of 0.51.
With a higher quarterly dividend of $1.19 is Hershey. Its trailing dividend yield, however, is slightly lower at 2.25% and the payout ratio is 0.48.
As for Tootsie Roll, it pays a quarterly dividend of 9 cents per share with a yield of 0.87% and a payout ratio of 0.23. As such, this makes it the least appealing of the three companies from an income perspective.
Although Hershey pays a superior dividend rate, Mondelez’s yield and payout ratio are slightly higher. This may make it more attractive to income-focused investors, but likely not by much.
View on valuation
The answer to the question of the company’s appeal could lie in its valuation.
Mondelez has an $89.53 billion market cap; its shares were trading around $65.81 on Thursday with a price-earnings ratio of 21.79, a price-book ratio of 3.13 and a price-sales ratio of 2.63.
The GF Value Line
VALU
suggests the stock is modestly undervalued currently based on its historical ratios, past performance and analysts’ future earnings projections.
However, the GF Value Line also found Hershey and Tootsie Roll to be undervalued, so that is likely not the answer.
At 82 out of 100, the GF Score indicates Mondelez has good outperformance potential with high ratings for momentum and profitability and more moderate growth, financial strength and value ranks.
Hershey has a similar score at 83, raking in high ratings for growth, profitability and value. Its financial strength is more moderate, while momentum is low.
The GF Score is another area where Tootsie Roll comes up short at 76. This means the company is likely to have average performance going forward on the back of high ranks for profitability, financial strength and value. The growth rating is more moderate, however, and momentum is low.
Comparing the strengths and weaknesses of the three companies, it is clear that while there is some overlap for four of the criteria, Mondelez handily beats out the other two with regard to momentum.
Although all three stocks have recorded negative performances year to date, Mondelez has posted the smallest decline at 1.08%. Hershey has fallen 18.56% and Tootsie Roll has tumbled 26.47% over the same period.
MDLZ Data by GuruFocus
Further, over the past 12 months, Mondelez has climbed 11.16%, while Hershey declined 19.44% and Tootsie Roll retreated 21.74%.
Final thoughts
Overall, the three confectioners appear to have strong financials and margins, meaning they are likely to continue to perform well in the years ahead since their products will remain in demand regardless of economic conditions.
However, given that Hershey and Tootsie Roll are older companies, expectations for their growth and performance are likely already baked in to the share price. As such, Mondelez has greater potential to gain following a major announcement like earnings, which may be where its advantage lies.
Disclosures
I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours.
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