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Lotte Confectionery Has Been Growing With Sales

- By Holmes Osborne, CFA

Lotte Confectionery (004990.KS) is a South Korean candy and food company. Sales and earnings have grown for a long time, and the stock is reasonably priced. Wintergreen Fund (Trades, Portfolio) recently bought shares.


The stock trades for 196,500 South Korean won ($171.43), there are 14.21 million shares, and the market cap is 2.8 trillion won. It takes 1,156 won to buy one dollar. The dividend has grown at 15.15% over the last 13 years. The dividend is 1,127 won, and the dividend yield is 0.57%. The earnings are 5,045 won, and the price-earnings (P/E) ratio is 38.9.

Sales increased from 1.86 trillion won in 2011 to 2.26 trillion in 2015. That's some growth! Gross profit increased from 668 billion won to 814 billion won. Trailing 12 months revenues are 2.229 trillion. The stock trades at a price-sales (P/S) ratio of 1.25. Pretty cheap for a candy company. Hershey (HSY) trades at a P/S ratio of 2.2.

Nearly two-thirds (66%) of revenue comes from candy, 20% ice cream, 9% bake and the rest is classified as other. Cash is listed as 290 billion won and receivables 338 billion won. This is to 247 billion won in payables and 658 billion won in liabilities. That's an incredibly strong balance sheet. The debt is AA+ according to the company. It doesn't mention (or I can't find) which credit agency issued the rating.

Major shareholders include: Lotte Aluminum with 15.29%, Lotte Co. with 9.89%, the Lotte Scholarship Fund with 8.69%, Dong Bin Shin with 9.07% and Kyuk Ho Shin with 6.83%. Like many Asian companies, there are cross-holdings. Unlike most Asian companies, the two heirs, listed above, are fighting over ownership. They own shopping malls, aluminum, candy, drinks, hotels and several other businesses.

In the most recent quarter, sales fell from 1.365 trillion in 2015 to 1.347 trillion. Profit margins were 5.1% and operating margins 6.7%. Very profitable which is no surprise as the company is in the candy business. Operating cash flows were 218.284 billion won in 2015, capital expenditures were 153.171 billion won, and free cash flow was 65.113 billion won. Last year's free cash flow yield was 2.3%.

Lotte makes gum, chocolate, biscuits, ice cream, pies which are kind of like Twinkies and that kind packaged sweets, salty snacks, various candies and pastries. I noticed that it sells Doritos and Cheetos. Lotte does a lot of business in developing markets like Pakistan, Vietnam, China and Africa.

China recently blocked 1,300 pounds of Lotte's candy from entering the country. It's thought that this is in retaliation for selling a piece of property to the Korean government for deployment of an anti-missile. The parent company sold a golf course to the Korean government. Now, all the subsidiaries have seen increased government scrutiny.

I got the idea from looking at GuruFocus and saw that Wintergreen Fund (Trades, Portfolio) bought shares. It will be interesting to hear from David Winters (Trades, Portfolio) on the purchase. The stock does not trade in the U.S. so you will have to ask your broker to buy overseas. The major discount brokers can do this.

Lotte is an interesting company. It's shown awesome growth, the shares are reasonably priced, and the company is expanding into emerging markets. I'd like to know more before I bought shares. Korean companies can be a little more difficult to analyze, and the foreign listing adds a level of complexity.

Disclosure: We do not own shares.

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This article first appeared on GuruFocus.