Wine And Chocolate: A Sweet Deal For Investors
If there are two surefire ingredients to a happy holidays, they'd have to be chocolate and cocktails. But there's another way to indulge in these treats: in your portfolio. So this year, put your money where your mouth is to enjoy appetizing returns. Sweet Returns
The U.S. may have been in a recession in 2008, but the U.S. Department of Commerce (DOC) reported that the average U.S. consumer spent 1.1% more on candy ($92.91). The increase appears to have been caused by escalating confection ingredient prices, because the actual amount of candy purchased decreased 4% to 23.8 pounds. According to the National Confectioners Association (NCA), candy makers reaped a 35% profit margin on retail sales. The industry thrives on holiday purchases, with most sales occurring around Valentine's Day, Easter, Halloween and Christmas. What does this mean for investors? The cyclical candy sector may be a tasty portfolio treat.
The returns may be tantalizing, but don't just grab at the first sweet opportunity; the $28 billion retail candy industry is very competitive. New and improved products keep consumers coming back, and many companies are working on offering more sugar-free and lower calorie choices. But the biggest seller is chocolate. The recent increased media hype around the health benefits of dark chocolate have given the industry a boost. According to recent research, chocolate containing 70% or more cacao is said to have high levels of antioxidants, which help fight heart disease. Now that's a sweet deal!
Merger and acquisition is a common growth strategy for the confection industry. There are more than 300 major American candy producers. Some of the biggest names are privately held, like Mars and Jelly Belly, but investors can buy shares in The Hershey Company (NYSE:HSY), which currently holds 42% of the U.S. market. The company's recent share price reflects operations struggles, but with a price-to-earnings ratio of 20 - compared to an industry average of 33 - it appears to be a good value. Earnings per share growth is actually down 11% over the last three years, and the company is currently in talks to buy European competitor Cadbury (NYSE:CBY).
American candy exports increased 20% last year, so investors who are looking to diversify may also consider European American depositary note (ADR) Nestle (OTC:NSRGY). Other companies also profit from candy sales. Discount retail giant Wal-Mart (NYSE:WMT), for example, is the leading American candy retailer, with 12.8% of the market according to NCA and DOC shipment reports.
What's the best beverage for washing down a fine piece of chocolate? A glass of wine, of course! In 2009, the Wine Institute reported data from Gomberg, Fredrikson & Associates, which indicates that U.S. consumption of sparkling wine or champagne bounced back to pre-recession numbers, with 8.2 million cases sold in 2008. Americans enjoyed 2.48 gallons of wine per person. Wine imports to the U.S. account for 25% of consumption, mostly from Europe, but wine is increasingly imported from Australia, New Zealand, Canada, South Africa, Argentina and Chile. U.S. wine exports are also increasing. (For background reading, see Parched For Profits? Try Beverage Stocks.)
The U.S. wine industry is highly fragmented. The Department of Commerce reported an 81% increase in the number of wineries since 1999 to about 5,000. The Department of the Treasury Alcohol and Tobacco Tax and Trade Bureau's November Wine Report documents that more than 400 million bottles of wine were produced from January to September, 2009.
New York based Constellation Brands (NYSE:STZ) is the largest wine company in the world, with numerous domestic and international holdings which include beer, wine and spirits. Constellation Brands holds 15% of the U.S. wine market with popular wine brands like Robert Mondavi and Arbor Mist. Competition has made it increasingly difficult to make a profit. The company has been selling off brands and paying down debt.
The U.S. government carefully controls the manufacture, distribution and sale of alcoholic beverages. Ongoing regulation tweaks address concerns such as sales directly from manufacturers to consumers, internet purchases from retailers and widely differing state laws. Most wine distribution and wholesale companies are privately held, with companies like Costco (Nasdaq:COST) blurring the line between retail and wholesale. The $25 billion wine retail industry is flourishing, with new wine-tasting franchises increasing the availability of products to consumers. Retailers are also cutting out the middle man. Wal-Mart and E&J Gallo inked a deal s to offer "store-brand" bottles of wine to customers.
The Bottom Line
The wine and candy industries are complex and fluid, but worth tasting. Investors should consider the entire supply chain. When paired with a diverse portfolio, sugar and alcohol should satisfy a discriminating investor's palate.