A 'first look' at chocolate maker Lindt's stock

My latest excursion in Europe just put a new stock on my radar...

While in Switzerland, my wife Susan and I took a scenic 45-minute boat ride on Lake Zurich yesterday to the little town of Kilchberg on a different part of the lake.

There, we visited the headquarters of the iconic Lindt chocolate maker:

Regular readers know that stories and pictures from my travels are the last items in my daily e-mails. But in this case, I'm leading with it because Lindt is a public company.

It trades on the Swiss stock exchange under the name Chocoladefabriken Lindt & Sprüngli with the ticker LISN. In the U.S., it also has an American depositary receipt ("ADR") that trades on the pink sheets under the ticker CHLSY.

I'm not an expert on chocolate making. And while I've eaten Lindt's premium chocolates and seen the commercials on TV in the U.S., I hadn't thought about the business from an investing perspective until yesterday...

Lindt's products are known across the globe. The company makes them at 12 of its own production sites in Europe and the U.S, and they're sold by 36 subsidiaries and branch offices – in about 520 of the company's own stores as well as through more than 100 independent distributors across the globe.

In Switzerland, Lindt's headquarters is a huge tourist attraction – it was mobbed and tickets to take a tour are sold out long in advance. That popularity got me interested in digging deeper.

So today, let's check out Lindt through my usual "first look" lens and see if there's an opportunity with the stock...

Starting with the stock itself, you can see in this chart that Lindt has been an incredible performer over the past 20 years...

Not surprisingly, the stock has been driven by strong, steady growth in revenues and net income:

Free cash flow ("FCF") has shown a similar trajectory, as the business has low capital expenditures ("capex"):

Turning to the balance sheet, Lindt's is healthy. It has a modest amount of net debt (it actually had a net cash position until it acquired Russell Stover Candies for roughly $1.5 billion in 2014):

Other than that one big acquisition, Lindt hasn't made any in the past two decades. Instead, the company has allocated its FCF to share repurchases and a steadily rising dividend (though the stock only yields about 1.1% currently):

In summary, our "first look" shows a great company with well-known global brands, which is reflected in excellent financials: strong, steady growth of revenues, profits, and cash flows... a healthy balance sheet... and good capital allocation.

So I had high hopes when I looked at the valuation – which were quickly crushed unfortunately...

After a double-digit run higher so far this year, Lindt has a roughly $39 billion market cap and a nearly $40 billion enterprise value. The stock trades at about 5.7 times trailing 12-month revenues, 45.7 times earnings, and 42.2 times this year's consensus analysts' estimates.

I would pay up for the stocks of high-quality businesses, but not more than 40 times earnings!

I think Lindt would be interesting at half the current multiples. So that means adding it to my "bench" to keep an eye on – and hopefully revisit with a deeper dive in the future if the valuation gets more compelling...

Best regards,

Whitney

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