Short description
Cloetta is a leading confectionery company based in Sweden, with a history dating back to 1862. The company produces a wide range of sweets, including chocolate, candy, pastilles, and gum.
Its history is marked by acquisitions, mergers, splits, and similar developments. In the Netherlands, Cloetta has acquired several companies, including Venco, which has been around since 1878, and Leaf (which includes Red Band).
Well-known Cloetta brands include Läkerol, Cloetta, Red Band, Malaco, Sportlife, Venco, and Jenkki. These brands have been established for decades, some for as long as 150 years, and are recognized as strong brand names.
Why we selected Bonava
Cloetta is a local market leader in confectionery, but in recent years it has faced challenges due to the pandemic, inflation, and high sugar and cocoa prices, which have temporarily put pressure on its results.
I consider these issues to be temporary and expect margin recovery and possibly further growth. Even without revenue growth or margin improvement, the purchase price at the time already yielded an annual return of 12% on my investment.
Meanwhile, the stock price has risen by more than 42% in just five months. What’s the best step to take now?
Updated ratios
The stock's potential relative to our fair value has shrunk to 10.5%. Without the opportunity to benefit from a revaluation of the share price, return ratios below 10% become less attractive.
Numbers update
In the first nine months of the year, Cloetta’s revenue increased by 3.4% to SEK 6.33 billion.
Operating profit fell by 1.1% during this period to SEK 555 million. In the third quarter alone, SEK 238 million was achieved, an 18.4% increase compared to the previous year. This is not unusual, given the rising sales volume with the holiday season approaching.
The profit increase is primarily due to margin improvement in the Pick & Mix segment, where operating profit rose by 18.6%. In the U.S., Pick & Mix is even called "Swedish Candy," and its popularity has grown significantly thanks to social media.
Net profit rose by 6.7% from January through the end of September, reaching SEK 319 million.
The biggest news of the recent period, however, remains the decision to put the Greenfield project in the Netherlands on hold due to an energy supply shortage.
Is doubling in five years possible from here?
We chose Cloetta with the expectation that, even without a price increase, we could achieve an annual return of around 12% on our investment just of the profits.
Now that the price has risen by over 42%, this expected return drops to about 8.4%.
Additionally, our margin of safety was based on expected margin improvements, not only from more stable and favorable raw material prices but also from replacing three factories with a single new one. Now that this project is paused, it’s unclear what alternative might be pursued.
With the rapid 40% increase in share price, leaving the current value only 10% below our calculated fair value, we’ve already realized most of the return.
Therefore, I think it’s wise to take profits now. A 42.2% price increase in five months translates to an IRR of over 125%. While I don’t find the IRR (internal rate of return, or annualized return) particularly relevant in such cases, it does illustrate how exceptional this rise is. If the market rewards you so quickly, it’s best to take it, freeing up capital for other stocks that may take longer to appreciate than expected.
For this reason, I’m deciding to sell my position in Cloetta. The freed-up capital can be better invested in other stocks from our selection. In addition to the top five from yesterday,