We recently compiled a list of the 10 Best Chocolate Stocks to Buy Now. In this article, we will look at where The Simply Good Foods Company (NASDAQ:SMPL) ranks among the best chocolate stocks to buy now.
Chocolate is a sweet treat made from cocoa beans that are harvested, fermented, dried, roasted, and ground into cocoa mass, the core ingredient in chocolate. This mass then undergoes further processing to produce various types of chocolate.
The Confectionery Sector’s Performance
The confectionery sector saw a modest 3.74% year-to-date (YTD) increase compared to the broader market’s 18.13% rise. Rising input costs have driven up prices, particularly cocoa prices which have tripled in the past 12 months due to crop diseases in West Africa, which contributes around 80% of the world’s cocoa output, as reported by Food & Drink Digital. According to a report by J.P. Morgan, chocolate brands are grappling with higher cocoa costs (reached $10,000 per metric ton in March 2024) and are passing these increases on to consumers through price hikes. Ken Goldman, lead equity research analyst for U.S. Food Producers and Retailers at J.P. Morgan, made the following comment about this:
“In the U.S., Hershey has been very clear that list pricing is still one of the most important arrows in their quiver to offset inflation. Over the next year or two, they will probably pass on more cocoa inflation, and consumers will see higher prices for their chocolate as a result.”
The broader economic environment, including inflation and interest rates, also impacts consumer spending patterns, which further affects the confectionery sector. Increased prices in essential goods, such as food, can lead to reduced discretionary spending, impacting sectors like confectionery.
However, cocoa prices are expected to ease slightly in the medium term and may stabilize around $6,000 per metric ton. This could result from improved weather conditions and increased planting of cacao trees, which may provide some relief to the chocolate market.
The Chocolate Market Outlook
Despite the ongoing cost and pricing concerns, the global chocolate market has experienced significant growth, reaching an estimated $119.39 billion in 2023. According to Grand View Research, the market is projected to continue growing at a compound annual growth rate (CAGR) of 4.1% from 2024 to 2030.
According to a report by Dame Cacao, approximately 7.5 million metric tons of chocolate are consumed globally each year, equivalent to nearly 2.2 pounds (1 kg) of chocolate per person. The U.S. leads as the largest chocolate importer, with $955 million in chocolate-related imports in 2023, followed by France at $772.5 million during the same period, according to IndexBox.
Rising Consumer Awareness in the Chocolate Industry
Consumer awareness is reshaping the chocolate industry, driving a surge in demand for specialty chocolates. In the National Confectioners Association’s State of Treating Report 2021, we find that there is a growing interest in organic, vegan, gluten-free, and sugar-free chocolates. Single-origin and bean-to-bar chocolates are gaining popularity for their distinctive flavors. Research highlights the health benefits of dark chocolate, including improved blood circulation and high flavonoid content, which further fuel its popularity.
Leveraging Chocolate as a Marketing Tool
In a competitive marketing landscape, chocolate is proving to be a powerful and versatile tool. Custom-branded chocolates not only create memorable experiences but they also enhance brand perception and boost client loyalty. Personalized chocolate gifts featuring logos or tailored messages offer a personal touch that fosters deeper connections. In addition, the visual appeal of chocolate makes it ideal for social media, driving engagement and brand visibility. This showcases chocolate’s powerful appeal to global consumer segments.
Methodology
For this list, we scanned Insider Monkey’s Q2 2024 database and selected companies involved in the chocolate industry, focusing on areas relevant to chocolate production and distribution. From that group, we picked 10 companies with strong balance sheets and solid financials and ranked them in ascending order of hedge funds having stakes in them.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
The Simply Good Foods Company (NASDAQ:SMPL)
Number of Hedge Fund Holders: 23
The Simply Good Foods Company (NASDAQ:SMPL), headquartered in Denver, Colorado, is a consumer packaged food and beverage company offering snacks and confectionery items under the Atkins, Quest, and OWYN brands. Atkins is renowned for its low-carb, high-protein chocolate bars and shakes, providing delicious options for those looking to manage their weight. SMPL ranks eighth on our list of the best chocolate stocks.
On August 26, Quest Nutrition launched its new Quest Bake Shop line, introducing protein-packed Chocolate Brownies, Blueberry Muffins, and Chocolate Chip Muffins. This new product line marks Quest’s first foray into the bakery category, offering health-conscious options. This way, the company hopes to capture the market segment that seeks products that not only satisfy their sweet cravings but also meet their protein requirements.
In Q3 2024, The Simply Good Foods Company (NASDAQ:SMPL) reported net sales of $334.8 million, a 3.1% year-over-year (YoY) increase. This growth was fueled by a 13% rise in Quest retail takeaway, driven by strong demand for salty snacks.
However, Atkins saw a 5% decline in the retail takeaway, likely due to shifting consumer preferences toward more diverse low-carb options. Despite these challenges, net income grew to $41.3 million, supported by improved gross margins, with EPS reaching $0.50, beating expectations of $0.48. Lower ingredients and packaging costs further drove the company’s earnings.
Additionally, Simply Good Foods reported a cash balance of $208.7 million, driven by a 50% increase in cash from operations. The company used reserves for the OWYN acquisition and aims to reduce its $490 million term loan to achieve a 1.25x net debt-to-adjusted EBITDA ratio.
A 3.56% uptick in the stock over the past month is attributed to optimism surrounding the OWYN deal. However, a 13.65% YTD decline is partly due to rising cocoa prices. Looking ahead, the stock’s performance is expected to improve as the company benefits from synergies and operational efficiencies gained through the OWYN acquisition, which was made in April 2024.
As of Q2 2024, 23 hedge funds, holding a combined investment of $192 million, remained bullish on the stock, according to Insider Monkey’s database.
Overall SMPL ranks 8th on our list of the best chocolate stocks to buy now. While we acknowledge the potential of SMPL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SMPL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.
