Swedish Confectioner Cloetta Trades at a Resonable Valuation

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- By Holmes Osborne, CFA

Cloetta (CLA) is a Swedish confectionary company whose stock is trading at very reasonable valuations. The company has grown through M&A and is a holding of Tweedy Browne (Trades, Portfolio).


The company has 287 million shares, trades at 31 krona ($3.53), and has a market cap of 8.9 billion krona ($1 billion). It takes 8.8 krona to buy one dollar. Trailing earnings per share are 1.42 krona and the stock trades at a price to earnings (PE) ratio of 21.8. The stock does not pay a dividend.

Growth has been strong. Sales were 4.658 billion krona in 2011 and grew to 5.674 billion in 2015. Earnings have grown from a loss of 68 million krona to 386 million krona over that time frame. Free cash flow was an outstanding 766 million krona last year, and the free cash flow yield is 8.6%. The balance sheet is a little debt heavy. Cash is 233 million krona and "other", which I assume is accounts receivables, is 866 million krona. Debt is 2.938 billion krona. Management plans on reducing debt by 140 million krona a year and begin issuing a dividend. The dividend policy is to payout 40% to 60% of net profits.

Like many food and confectionary companies, it is very profitable. Gross margins are 40.9% and Ebit margins are 10.2%. According to Morningstar, the return on equity is 9.6% and return on invested capital is 6.53%. The valuation is 1.6 times sales and 9.9 times cash flows. Seems reasonably priced.

Cloetta sells jelly beans, chocolate bars, toffee, licorice and other candies under the names: Plopp, Yup, Tuple, Jenkki, Lakerol and several others. I've never heard of any and to the American ear, the names sound guterral. Sweden accounts for 30% of sales, Finland 18%, Denmark 6%, Norway 4%, Italy 13%, Holland 13% and other countries 16%. Definitely a Nordic company. Currency impacts have been minor.

Many of their products can be purchased through "Pick and Mix". This is when you go into a grocery store and open the bins and buy various candies. I see more of this with nuts and dried fruit in American grocery stores.

I found the company by perusing Tweedy Browne (Trades, Portfolio)'s holdings. AB Malfor Promotor is the top shareholder with 24.3% of the stock and 42.1% of the vote. This is what I don't like about Nordic stocks--there is usually a separate voting class. So any M&A or major decisions is made by Malfor. The company is looking for a new CEO as the interim stepped down. I wonder why he left? Maybe the board didn't offer him the full-time job.

Last year, Cloetta bought three small European confectionary companies. The price of sugar has almost doubled in the last year to 22.92 cents per pound. A drop in sugar prices could help drive profit, or a rise could dampen earnings. Wholesale chocolate has increased from $1.64 to $1.82 from a year ago.

Compared to Hershey (HSY), Cloetta's stock is cheap. Hershey trades at a trailing PE of 28 and 2.78 times sales. Cloetta trades in line with Linde (LENGY), which trades at 22.5 PE and 1.6 times sales.

I like Cloetta. The only issue is that it doesn't trade in the U.S. You'd have to have your broker buy shares in Sweden. It's very reasonably priced. It appears that the discount is probably due to the M&A and the market not being used to what Cloetta has become.

Disclosure: We do not own shares.

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