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Monday, December 13, 2010

Part 2: Nestlé Celebrates Kit Kat's 75th Birthday - What Other Chocolate Franchise is Celebrating a Meaningful Anniversary?

In our "Part 1" post on 12/1, Nestlé Celebrates Kit Kat's 75th Birthday - What Other Chocolate Franchise is Celebrating a Meaningful Anniversary?, we presented our question along with five hints:
  1. Older than Kit Kat.
  2. Smaller scale than Nestlé.
  3. Growing nicely and gaining market share.
  4. U.S. domiciled and focused.
  5. Previously mentioned here on CS$.
We were pleased when a reader provided the correct answer to our question in the comments section (thank you "Anonymous" whoever and wherever you are!).

Before we share the answer here, let's relay a bit more on "Good Food, Good Life" Nestlé (NSRGY.PK). As we indicated the other week in mentioning the 7th Nestle International Nutrition Symposium, nutrition may not immediately come to mind since, at least in the U.S., Nestlé is perhaps best known for selling a variety of chocolates.

YET, Nestlé provides a wide array of products and services that people either need or keep coming back for more, including confections (which, surprisingly, is only 11% of sales). Here's an overview of the company's fiscal 2009 sales by category (from recent investor deck):

Through acquisition, the company grew into the diverse business that exists today:

With an impressive variety of disparate, "billionaire brands":

As a result, the company generates consistent operating margins (mid-teens) and healthy excess cash flow that is used in shareholder friendly means (reinvestment, M&A, debt reduction, dividends, share repurchase). So long as the sun rises and the world-as-we-know-it doesn't end,
Nestlé will be around and will likely be bigger, better, stronger over time.

THUS, it may come as no surprise that Nestlé is favored by numerous value investors, including David Winters of the Wintergreen Fund. For those interested, Mr. Winters shares his thesis in various media appearances and articles found on his Web site (e.g. mention in Kiplinger's current issue).

We can also go back to a Wealthtrack episode from nearly one year, on 12/25/09, where Mr. Winters covers his global, common sense investment approach. He touches briefly on Nestlé around minute 18 and again around minute 22:
  • On this week's Consuelo Mack WealthTrack, a Christmas weekend treat. Noted value investor David Winters, who Smart Money magazine identified as one of the "world's greatest investors," joins Consuelo in one of her "Great Investor" interviews to share where he is finding value in the market now.

Mr. Winters shares more than a few sensible points, including:
  • "streams of income from around the world"
  • "makes a lot of sense for individuals today"
  • "be buyer when others panic... the richest people in world, this is what they do"
So, with this background, let's now return to the birthday brand -- Nestlé is celebrating Kit Kat's 75th birthday* this year (*acquired brand in 1988 with acquisition of U.K.-based Rowntree):

We mentioned that Hershey (HSY) sells the brand in the United States under a longstanding license agreement that pre-dates Nestlé's ownership.

So, what is the other another chocolate franchise that happens to be celebrating a major milestone this year? The reader got it right: Fannie May Confections, owned by 1-800-Flowers.com (FLWS). Fannie May is celebrating its 90th anniversary this year - cover of recent catalog:

Fannie May's history is detailed here. Interestingly, Fannie May is actually one year senior to Berkshire Hathaway's (BRK-B, BRK-A) larger See's Candy, which was founded in 1921. We like See's, but we also like Fannie May's chocolates and are confident that the quality of FM's products and service is high. Per our prior posts, we recommend the Pixies. Please don't be shy, give them a try!

Fannie May is a large part of our 1-800-Flowers.com investment thesis and we've been adding to our position in recent weeks/months. While shares recently nudged higher, we continue to believe the "Market" misunderstands the story.

We'll soon share a bit more.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long FLWS, BRK-B.

© 2010 Jeffrey Walkenhorst
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