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Happy Valentine: Margins Threatened at Chocolate Makers Hershey and Mondelez?

Jeff Bailey

A smart BusinessWeek article on the crummy state of cocoa farming – yields, unlike much of agriculture, have been stagnant for years and some West African farmers are switching to more lucrative crops – should be cause for concern among investors in Hershey (HSY) and Mondelez (MDLZ), the Kraft spinoff that owns Cadbury.

The article suggests that higher cocoa prices are in our future and that chronic shortages could grow worse. As one sees in the stock chart below, the price of cocoa is a pretty good counter-indicator on a chocolate maker’s fortunes.

HSY Chart

Investors are paying up – a PE ratio of 28 – for Hershey’s pretty-decent revenue growth. A valuation that high suggests the shares could be vulnerable to a turn in cocoa prices.

HSY Revenue TTM Chart

Mondelez, a no-growth company and less of a pure play on chocolate, trades at a PE ratio of about 15.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com.

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