Even in bad economic times there is an item that I think most will agree is affordable and which can help melt worldly cares away in a single bite. That item is chocolate, and it's something investors can savor just as easily as gourmands. But which confectionery to choose? It's a bit like being presented with a box of chocolates and trying to select the one with your favorite filling. Read on for some clues as to which companies will make the sweetest addition to your portfolio.
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Time to Take a Bite?
115-year-old chocolate maker Hershey (NYSE:HSY) certainly has several things going for it above and beyond its terrific products and name recognition throughout the chocolate loving world. For example, for three straight quarters, this company has beaten estimates. And going forward, I think that the company has the potential to grow even more, particularly as populations increase and the economy bounces back. In addition, with the stock approaching its 52-week high I think a larger number of investors and would-be investors may be paying attention.
However, there are also some things that give me pause. For example, this stock is not cheap on a price-to-expected earnings basis. In fact, it trades at around 19 times this year's estimate of $2.08. This is company that is expected to grow its EPS at about 7.7% over the next year, but ideally, I'd rather see the shares pullback to the low $30s before pulling the trigger.
In addition, I prefer to get involved in situations in which there is a substantial catalyst on the near horizon. In Hershey's case, I just don't see any. This is a good solid company that should grow over the long term, but the company hasn't provided any reason to believe the stock will make a jump in the near future.
What to Watch For
Hershey's is expected to release its third-quarter numbers on October 22. Wall Street expects the company to earn 67 cents. I think it will at least hit that number and that it could beat it. That said I'll be even more interested in what management has to say. Hopefully, Hershey's will provide some nuggets of information about what the remainder of the year and 2010 might hold in store. If it is unusually upbeat or reveals something that might enable it to exceed the full-year estimate for this year, that might sweeten this potential pick.
Some Other Sweet Food Plays
I also like Cadbury (NYSE:CBY) for the longer run given its position in the confectionery business. But even though I think the stock could make a new 52-week high soon I would rather wait for a better entry point. It trades at a hefty 22.7 times this year's estimate. Interestingly, Kraft (NYSE: KFT) is the big variable when it comes to Cadbury. The talk is that Kraft might pursue Cadbury and seek to combine forces.
I feel that could be a good thing, as I'm a big believer in Kraft's prospects. Not only does the company have a large number of well-known and hard-to-live-without items under its umbrella, it also trades at 13.3 times this year's estimate, which certainly makes my mouth water. Meanwhile, Nestle (OTC:NSRGY) is also worth a look. Not only does it have a great name, but it also trades at a very reasonable 14.7 times this year's estimate. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)
Bottom Line
I like Hershey's and don't doubt it could have a bright future, but it's also pricey and lacks a near-term catalyst. It's these two things that are keeping me on the sidelines for now.
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