Are Candy Stocks like Mondelez (MDLZ) Doomed by the Rise of Online Grocery Shopping?

Mondelez International Inc. (NASDAQ:MDLZ), which counts Oreo, Cadbury, Trident, and Toblerone among its vaunted portfolio, is trading near 52-week lows. Unlike the other two companies discussed below, Mondelez is in a better position in terms of its product mix better aligning with the growing trend towards healthier snacking. Mondelez is also looking towards the upper-end of the market, citing specialized food experiences as a potential growth market.

Mondelez’s revenue has been consistently falling over the past few years, though net income growth has been solid and is even accelerating, with double-digit growth now expected this year. Nonetheless, the company’s large debt load ($13 billion in long-term debt) and relatively paltry annual dividend yield (2.19%) hold it back from being an overly attractive play, despite hovering around yearly lows.

Hershey Co (NYSE:HSY) is in a much worse position than Mondelez, as it relies far more heavily on impulse purchases. The company is aware of that, and aware that online sales are cutting into sales of its products, as evidenced by its recent In a Shopper’s World annual report, which stated that 25% of online shoppers who pick up their orders in-store cut back on their impulse purchases.

Credit Suisse’s Robert Moskow downgraded Hershey last week, predicting that even under a best-case scenario where online grocery shopping only accounts for 20% of grocery sales, Hershey’s sales would still decline by 0.5% annually. UBS also cut its rating on Hershey to ‘Sell’ back in April, citing the same headwinds from online sales and healthier eating trends, as well as intense competition in the chocolate space and rising cocoa prices.

Tootsie Roll Industries, Inc. (NYSE:TR) is not only the maker of the eponymous Tootsie Rolls, but also of Junior Mints, Frooties, Charleston Chew bars, and Dubble Bubble gum. Wall Street finally appears to be souring on the company, which has had relatively flat revenue and gross profit over the last five years, pushing its shares down by 16% in 2018.

Last October, Spruce Point released a report which slapped a ‘Strong Sell’ rating on Tootsie Roll shares, claiming that the company has long been overvalued based on the hope that it would eventually be a takeover target. It criticized the company’s lack of transparency, noting that it doesn’t host investor calls, has no analyst coverage, and omits vital financial information from its SEC filings. In terms of adjusted gross margin, Spruce Point estimated that Tootsie’s 31% figure is far below both Mondelez (46%) and Hershey (39%).

Hedge funds tracked by Insider Monkey also prefer Mondelez and Hershey to its smaller rival, with 53 being long Mondelez at the end of 2017, compared to 30 owning shares of Hershey and just 13 being shareholders of Tootsie Roll. Overall, hedge funds weren’t overly bullish on any of the three companies however, owning less than 5% of Hershey’s and Tootsie Roll’s shares, and less than 10% of Mondelez’s.

Disclosure: None