Cocoa prices have surged to record highs, with bad weather impacting crops. This would imply margin compression for chocolate companies and it’s not surprising that chocolate stocks are relatively depressed. This near-term headwind is a good opportunity to accumulate some undervalued stocks.
An important point to note is that the top chocolate stocks also offer an attractive dividend. Considering the valuations, expect high total returns from these stocks in the next 24 to 36 months.
In terms of size, the global chocolate market was estimated at $119.39 billion last year. Further, the market is expected to grow at a CAGR of 4.1% through 2030. The addressable market is significant and the top players will continue to create value. It’s also worth mentioning that growth in emerging markets is likely to be higher and companies are focusing on expanding their presence in these markets.
Let’s discuss three attractively valued chocolate stocks to buy for sweet gains.
The Hershey Company (HSY)
Hershey (NYSE:HSY) is the best name among chocolate stocks to consider. HSY stock looks undervalued at a forward price-earnings ratio of 20 and offers an attractive dividend yield of 2.84%. The stock has remained largely sideways in the last six months and I expect a rally after this consolidation phase.
For 2023, Hershey announced sales growth of 7.2% on a year-on-year basis to $11.2 billion. While the Company has guided for 2% to 3% growth in revenue for this year, EPS is likely to be flat due to higher cocoa and sugar costs. However, this factor is discounted in HSY stock.
In the long term, there are two reasons for being bullish. First, Hershey has continued expanding its product portfolio, including its presence in the salty snacks business. Further, Hershey has delivered 11.2% growth in international revenue last year. In the next five years, international markets will likely drive revenue and earnings growth.
Mondelez International (MDLZ)
Mondelez International (NASDAQ:MDLZ) stock has also remained subdued in the last 12 months. The key reason is that higher cocoa prices impact margins. The near-term headwind provides a good accumulation opportunity with MDLZ stock trading at an attractive forward price-earnings ratio of 20.2. Further, the stock offers a dividend yield of 2.37%.
As an overview, Mondelez holds the second position in the chocolate market, with a global market size of $120 billion. At the same time, the Company is among the top three players in segments that include biscuits, cake, pastries, and snack bars. Therefore, Mondelez has a big, addressable market and a strong brand portfolio.
Another reason to like Mondelez is the focus on emerging markets. For 2022, Mondelez reported 39% revenue from EMs. In the last four years, revenue growth in Ems has been at a CAGR of 10.7% compared to a CAGR of 3.8% in developed markets.
I must add that Mondelez reported a free cash flow of $3.6 billion last year. For 2024, the Company has guided more than $3.5 billion for FCF. Therefore, there is ample flexibility for dividend growth and share repurchase.
Lindt & Sprüngli AG (LDSVF)
With an operating history of over 175 years, Lindt & Sprüngli (OTCMKTS:LDSVF) is another name among chocolate stocks to consider. For the last financial year, Lindt & Sprüngli reported group sales of 5.2 billion Swiss francs, which was higher by 10.3% yearly.
It’s worth noting that the Company’s growth in Europe was relatively depressed due to macroeconomic headwinds. It’s the largest market for Lindt & Sprüngli. However, Lindt has been expanding its presence in emerging markets as with other chocolate companies. For 2023, EM growth on a year-on-year basis was 12.9%. This was higher as compared to North America and Europe.
From the perspective of value creation, Lindt expects revenue growth of 6% to 8% on an annual basis. Further, the Company is targeting 20 to 40 basis points in operating profit margin expansion per year. Expect healthy dividend growth on the back of potentially higher cash flows.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.