Cocoa prices reaching record highs due to adverse weather conditions impacting crops presents a challenging scenario for chocolate companies. Consequently, chocolate stocks have seen relative depression, offering investors an opportunity to accumulate undervalued stocks. Despite this near-term headwind, it’s noteworthy that top chocolate stocks often provide attractive dividends. Considering their valuations, these stocks are poised to deliver high total returns over the next 24 to 36 months.
The global chocolate market, valued at $119.39 billion last year, is projected to grow at a Compound Annual Growth Rate (CAGR) of 4.1% through 2030. This signifies a significant addressable market where top players are expected to continue creating value. Additionally, growth in emerging markets is anticipated to outpace that of developed ones, prompting companies to prioritize expanding their presence in these regions.
Now, let’s delve into three attractively valued chocolate stocks poised for sweet gains.
The Hershey Company (HSY)
Hershey (NYSE: HSY) stands out as a top choice among chocolate stocks. With a forward price-earnings ratio of 20 and a compelling dividend yield of 2.84%, HSY stock appears undervalued. Despite remaining relatively flat in the past six months, I anticipate a rally following this consolidation phase.
In 2023, Hershey reported robust sales growth of 7.2% year-on-year, reaching $11.2 billion. While the company has forecasted modest revenue growth of 2% to 3% for this year, earnings per share (EPS) may remain flat due to increased cocoa and sugar costs. However, investors seem to have factored in this concern, reflected in HSY stock’s valuation.
Looking ahead, there are two key reasons for a bullish outlook on Hershey in the long term. Firstly, the company has been actively expanding its product portfolio, including venturing into the salty snacks business. Additionally, Hershey achieved impressive international revenue growth of 11.2% last year. Over the next five years, it’s expected that international markets will be a significant driver of both revenue and earnings growth for Hershey.
Mondelez International (MDLZ)
Mondelez International (NASDAQ: MDLZ) has experienced subdued performance over the last 12 months, largely due to the impact of higher cocoa prices on margins. However, this near-term headwind presents an attractive accumulation opportunity, considering MDLZ stock’s appealing forward price-earnings ratio of 20.2 and a dividend yield of 2.37%.
In the broader context, Mondelez holds a significant position in the chocolate market, ranking second globally with a market size of $120 billion. Additionally, the company is a top-three player in various segments, including biscuits, cakes, pastries, and snack bars, indicating a sizable and diverse addressable market supported by a robust brand portfolio.
One of the compelling aspects of Mondelez is its focus on emerging markets (EMs), which accounted for 39% of its revenue in 2022. Over the past four years, revenue growth in EMs has outpaced that of developed markets, with a compound annual growth rate (CAGR) of 10.7% compared to 3.8% in developed markets.
Furthermore, Mondelez reported a strong free cash flow of $3.6 billion last year and has guided for more than $3.5 billion in free cash flow for 2024. This solid financial performance provides ample flexibility for potential dividend growth and share repurchases, enhancing the overall attractiveness of investing in Mondelez stock.
Lindt & Sprüngli AG (LDSVF)
Lindt & Sprüngli (OTCMKTS: LDSVF) stands out as another compelling option among chocolate stocks to consider, boasting an impressive operating history spanning over 175 years. In the last financial year, the company reported group sales of 5.2 billion Swiss francs, marking a robust annual growth rate of 10.3%.
While Lindt & Sprüngli faced relatively subdued growth in Europe due to macroeconomic headwinds, which remains its largest market, the company has been actively expanding its footprint in emerging markets, mirroring the strategy of other chocolate companies. Notably, the company experienced strong growth in emerging markets, with a year-on-year increase of 12.9% in 2023, outpacing growth in North America and Europe.
In terms of value creation, Lindt & Sprüngli has set ambitious targets, aiming for annual revenue growth of 6% to 8%. Additionally, the company targets a margin expansion of 20 to 40 basis points in operating profit margin per year. With the potential for higher cash flows, investors can anticipate healthy dividend growth from Lindt & Sprüngli in the coming years.