Mondelez International, Inc. (NASDAQ:MDLZ) shares are down more than -0.68% this year and recently decreased -0.28% or -$0.12 to settle at $42.51. The Hershey Company (NYSE:HSY), on the other hand, is down -3.01% year to date as of 01/11/2018. It currently trades at $110.09 and has returned -2.07% during the past week.
Mondelez International, Inc. (NASDAQ:MDLZ) and The Hershey Company (NYSE:HSY) are the two most active stocks in the Confectioners industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect MDLZ to grow earnings at a 10.88% annual rate over the next 5 years. Comparatively, HSY is expected to grow at a 8.40% annual rate. All else equal, MDLZ’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. EBITDA margin of 18.54% for The Hershey Company (HSY). MDLZ’s ROI is 4.80% while HSY has a ROI of 21.50%. The interpretation is that HSY’s business generates a higher return on investment than MDLZ’s.
The value of a stock is simply the present value of its future free cash flows. MDLZ’s free cash flow (“FCF”) per share for the trailing twelve months was +0.01. Comparatively, HSY’s free cash flow per share was +0.42. On a percent-of-sales basis, MDLZ’s free cash flow was 0.06% while HSY converted 1.19% of its revenues into cash flow. This means that, for a given level of sales, HSY is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. MDLZ has a current ratio of 0.50 compared to 0.90 for HSY. This means that HSY can more easily cover its most immediate liabilities over the next twelve months. MDLZ’s debt-to-equity ratio is 0.72 versus a D/E of 3.85 for HSY. HSY is therefore the more solvent of the two companies, and has lower financial risk.
MDLZ trades at a forward P/E of 18.02, a P/B of 2.46, and a P/S of 2.49, compared to a forward P/E of 21.03, a P/B of 28.37, and a P/S of 3.09 for HSY. MDLZ is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. MDLZ is currently priced at a -12.44% to its one-year price target of 48.55. Comparatively, HSY is -3.13% relative to its price target of 113.65. This suggests that MDLZ is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.00 for MDLZ and 2.60 for HSY, which implies that analysts are more bullish on the outlook for HSY.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. MDLZ has a beta of 0.95 and HSY’s beta is 0.30. HSY’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. MDLZ has a short ratio of 1.76 compared to a short interest of 2.60 for HSY. This implies that the market is currently less bearish on the outlook for MDLZ.
Mondelez International, Inc. (NASDAQ:MDLZ) beats The Hershey Company (NYSE:HSY) on a total of 8 of the 14 factors compared between the two stocks. MDLZ is growing fastly and has lower financial risk. In terms of valuation, MDLZ is the cheaper of the two stocks on an earnings, book value and sales basis, MDLZ is more undervalued relative to its price target. Finally, MDLZ has better sentiment signals based on short interest.