In this piece, I evaluated two food-making giants, Kellogg Company (K) and The Hershey Company (HSY), to determine the better investment. Based on the fundamental comparison of these stocks, I believe K is the buy, while HSY is best kept on hold for the reasons explained throughout this article.
The organic food industry is experiencing a notable surge in adopting organic foods across various categories, such as bakery products, snacks, infant formulas, and confectioneries.
Moreover, the increasing demand for innovative products and clean-label food options is further propelling the expansion of the organic food market. It is estimated that the organic foods market will witness a significant growth rate, with a projected CAGR of 12.1%, reaching $553.13 billion by 2033.
In addition, the food market is experiencing a notable change in consumer preferences, as more individuals are shifting from traditional home-cooked meals to convenient ready-to-eat products. This shift can be attributed to the increasingly busy lifestyles and hectic work schedules of many individuals, particularly those employed.
The ready-to-eat food market is projected to register a CAGR of 4.89% until 2028, which is good news for auto companies like HSY and K.
K is a clear winner in terms of price performance, with 1.33% returns over the past month compared to HSY’s 4.1% decline. K has gained 1.8% over the past five days, while HSY gained marginally.
Here are the reasons why we think K could perform better in the near term:
Latest Developments
On May 16, K and Six Star Pro Nutrition teamed up to create the ultimate athlete’s dream: Frosted Flakes® and Froot Loops® flavored SIX STAR 100% Whey Protein Plus, coming this August to Walmart® and other leading retailers near you, as well as on the web at www.sixstarpro.com.
This game-changing partnership will not only see the reinvention of two time-tested breakfast favorites into high-performance protein but will leverage the beloved Tony the TigerTM and Toucan SamTM characters.
Conversely, on March 30, HSY announced a six-year extension with CBS Sports, Warner Bros. Discovery Sports, and the NCAA as the “Official Confectionary Partner.” The extended agreement would designate two of HSY’s expanding salty snack brands: Dot’s Homestyle Pretzels and SkinnyPop Popcorn, as the NCAA’s “Official Pretzel and Popcorn Partner.’
In the same month, HSY introduced two new plant-based additions to HSY’s and Reese’s brands: Reese’s Plant-Based Peanut Butter Cups and Hershey’s Plant Based Extra Creamy with Almonds and Sea Salt. These newest chocolate confections made with dairy alternatives are expected to attract chocolate lovers looking for plant-based alternatives.
Recent Financial Results
K’s net sales for the first quarter ended April 1, 2023, increased 10.4% year-over-year to $4.05 billion. The company’s adjusted gross margin was 31.3%, compared to 30.4% in the year-ago period. Its adjusted operating profit increased 15.3% year-over-year to $549 million.
In addition, its adjusted EPS remained flat year-over-year at $1.10. Also, its adjusted gross profit rose 13.7% year-over-year to $1.27 billion.
On the other hand, during the first quarter that ended March 31, 2023, HSY’s selling, marketing and administrative expenses grew 10.9% year-over-year to $581.59 million. However, its gross margin for the quarter was 46.3%, compared to 46.7% in the previous-year quarter. The company’s operating profit margin came in at 26.8%, compared to 27% in the year-ago quarter.
Past And Expected Financial Performance
K’s revenue grew at a CAGR of 5.2% over the past three years. Analysts expect the company’s revenue to rise 5% in the current quarter, 3.8% in the next quarter, and 5.4% in the current year.
On the other hand, over the past three years, HSY’s revenue rose at a CAGR of 10.3%. Analysts expect HSY’s revenue is expected to rise 6.6% in the current quarter, increase 8.6% in the next quarter, and rise 8.3% in the current year.
Profitability
K’s trailing-12-month ROCE, ROTA, and ROTC of 21.31%, 7.57%, and 4.41% are lower than HSY’s 53.30%, 17.37%, and 15.29%, respectively.
Thus, HSY is more profitable.
Valuation
In terms of forward EV/Sales, HSY is currently trading at 26.13x, higher than K, which is trading at 16.70x. Likewise, HSY’s forward EV/S multiple of 4.91 is higher than K’s 1.92.
Here, K is relatively affordable.
POWR Ratings
HSY has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, K has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories.
K has a grade of B for Stability, justified by its beta of 0.25. HSY, on the other hand, has a grade of C for Stability, in consistent with its beta of 0.35.
Moreover, HSY has an A grade for Quality. Its trailing-12-month EBIT and EBITDA margins of 21.63% and 25.22% are higher than the industry average of 6.67% and 9.92%.
However, K has a B grade for Quality. Its trailing-12-month EBIT and EBITDA margins of 9.37% and 12.39% are higher than the industry average of 6.67% and 9.92%.
Of the 80 stocks in the Food Makers industry, K is ranked #21, while HSY is ranked #24.
Beyond what we’ve stated above, we have also rated both stocks for Sentiment, Momentum, Value, and Growth. Get all K ratings here. Click here to view HSY ratings.
The Winner
The food industry is fueled by advancements in food processing technology and increased demand for processed food. Changing consumer preferences towards convenient ready-to-eat products are also reshaping the overall food market, driven by busy lifestyles and hectic work schedules.
Leading food companies HSY and K are expected to benefit significantly from the industry’s bright growth prospects.
However, HSY’s elevated valuations and bleak growth prospects make its competitor K a better buy now.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Food Makers industry here.
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K shares were unchanged in premarket trading Friday. Year-to-date, K has declined -2.30%, versus a 15.67% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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