Lindt White Chocolate Ice Cream and Chocolate Stocks

After making the rum raisin ice cream recipe, we decided to try our hands at a white chocolate ice cream recipe, which used whole eggs (rather than egg yolks), a 1/3rd increase in the heavy-cream-to-whole-milk ratio, left out the brown sugar, granulated sugar, and salt, and a few other tweaks in terms of the order in which the ingredients were assembled.  (For those of you who want to try making it yourself, we used this recipe and ended up doubling it so we had enough to share with everyone and get feedback on further refinements if it needed improvement.  Once again, as in the previous ice cream recipe, we opted for heavy cream with 40% fat rather than the more common 36% fat and the higher-quality Mexican vanilla.  We also decided that Lindt was the only acceptable white chocolate brand for the type of ice cream we wanted to produce.  If you want to end up with the same product we did, don’t substitute anything else as those are important distinctions.)

It’s one of the best flavors I’ve ever tasted in my life, if only for its simplicity.  The problem: The chemistry, as presented in the original white chocolate ice cream recipe we used, resulted in a base that had a difficult time freezing due to the relatively large proportion of white chocolate in it.  The process or ingredients need to be tweaked to overcome this obstacle.  It is also absurdly expensive to the point people would probably think you had lost your mind if you made it regularly.  The raw ingredients alone easily exceeded $20 for 2 pints.  If we were selling this in an ice cream parlor, for that equivalent output, we’d need to retail it for between $40 and $100 to have any chance at a reasonable profit margin after accounting for labor, depreciation, rental lease, utilities, insurance, et cetera.  Of course, we wouldn’t be paying retail for the input costs, and we could almost assuredly create our own blend of similar tasting white chocolate using bulk supplies, sugar, natural flavors, and such, permitting us to come down a bit, but I’m not sure you could get market acceptance for where you’d need to be outside of highly affluent areas in major cities.  (Though I don’t approve of it, it is understandable that food companies say, “Give us the white chocolate flavor” and create a chemical cocktail as a result.  Non-compromising quality takes work and money.)  Not to mention, those costs are artificially depressed by Congressional dairy subsidies, which allow the price of milk and other products to be far lower as the taxpayer picks up part of the cost every time you buy some.

On the other hand, this white chocolate ice cream recipe so sinfully decadent, so overwhelmingly rich, that a 100 gram serving is almost too much; definitely sufficient to satiate even the biggest appetite (the entire batch we made had a little over 6,800 calories, to give you an idea of how energy intensive it is).  If you actually tried to have something equivalent to what you’d get at Baskin Robbins or Cold Stone, you’d pass out on the floor.  It’s worth every penny if you’re a quality vs. quantity person, in which case you might want to get out your ice cream machine and start cooking a batch.

Heed my warning and heed it well: You probably won’t be able to go back to store bought ice cream after you’ve had it.  We talk about the economic phenomenon of decimal creep from time to time.  This is culinary creep.  Open this door and you’ll have a hard time accepting anything else because you’ll realize you’ve been cheated for most of your life.
Lindt White Chocolate Ice Cream

Pouring Lindt White Chocolate Into Ice Cream Base

Lindt White Chocolate Ice Cream Joshua and Aaron Kennon-Green

It did make me look up shares of Chocoladefabriken Lindt & Spruengli AG in Switzerland.  I talked about them a bit back in 2011.  I’d love to own part of the place; to have shares parked in our global custody account and held forever and ever along with the controlling family, who ensures quality is maintained.  At a bit more than 74,000 CHF per share, or an earnings yield of around 2%, I can’t justify the valuation multiple, though it’s not as bad as it looks with the Russell Stover acquisition, which should be a case of true synergy that leads directly to increased profitability in future years both through manufacturing efficiencies and the increased North American distribution channels for Lindt’s Swiss brands.

Speaking of chocolate firms, Hershey has been fascinating lately.  It’s going through what might turn out to be another one of its multi-year periods of neglect to the point it is most certainly fairly valued, if not slightly undervalued, at the moment provided you have a long-term horizon.  If you pop up a financial portal such as Yahoo, the Pennsylvania firm looks like it is trading at nearly 40x earnings, or a 2.5% earnings yield, but it’s an illusion.  The actual base, real economic earning yield is somewhere around 5% per annum give or take.  Though nothing in life is guaranteed – we could enter a nuclear war tomorrow and stocks be permanently wiped out along with a big part of the population, in which case we have much bigger issues – from a purely financial and competitive perspective, I’m of the opinion that the odds are more than satisfactory that a buyer of a large block of the stock today will be thrilled with his or her decision in 25 years, especially if the dividends are reinvested in some sort of tax shelter.  Alternatively, for a young person who has a long run ahead of them and who wants to dollar cost average over several decades, the Hershey Direct Stock Purchase Plan charges only a $2 base fee + 6¢ per share for automatic monthly purchases swept from a linked checking or savings account.  It makes me happy that, somewhere out there, a young Ronald Read might be signing up for it, adding yet another blue chip stock to his or her collection of holdings that, through the power of compounding and diversification, has a good chance at someday creating one more stealth fortune from modest means and common sense.

If anything, such a buyer should be quietly praying for a repeat of 2005-2009, when Hershey lost 50% of its market value on paper as it languished from neglect, everyone distracted with the excitement of the sub-prime banks and home construction firms; few people or institutions other than the Hershey Trust, pension funds, private wealth managers, and rich investors who consider it a multi-generational holding interested in it.  From peak-to-present, we’re at about a 20% loss so far but that’s not anything particular notable (before the Federal Reserve began meddling in things recently, it wasn’t statistically unusual for the stock market to fluctuate by 33% or more every 36 months; you’d expect to be up or down on paper by that much, which is useless except to the extent it gives you a chance to take advantage of the opportunity to acquire more ownership).  You see these things happen and that old 1965 song, I’m Henry the 8th I Am, comes to mind; “Second verse, same as the first”.  Human nature doesn’t change.  Over and over, round and round, there’s always something intelligent to do if you are patient, and liquid, enough to take advantage of it.

That would actually be a good homework assignment if I were teaching a college course … compare and contrast the risk-adjusted returns of the two firms at present valuations and explain how the reported numbers paint a different picture from the reality of the underlying economic engine.


  • Ang

    A lot of staples stocks took hits today on Fed rate speculation. I would be very happy if the inflated valuation on classic blue chips could come to an end soon – seems like ever since the crash, safety has been highly sought after and paid for (with good reason I would say), but I’d be thrilled if the money continues to flow out of companies like Hershey’s and Colgate Palmolive if it means I can purchase those companies for cheaper. Not that other investors deserve to lose their wealth from things like Facebook/Amazon/Netflix, but I do appreciate a good sale on companies that I want to hold for the long run

  • Mr.owenr

    Well there goes another weeks paycheck.

  • The Fed, in my opinion, is the primary entity to blame for the high blue chip valuations. With interest rates held near zero for ages, there is nowhere to secure a decent, stable return for folks with conservative portfolios and on fixed incomes. Remember when savings accounts, certificates of deposit and Treasury bonds paid a decent interest rate, adequately above inflation, for zero risk? Gone are those days, and as a result, all the money is flocking into blue chip dividend aristocrats to secure 2.5+% yields SOMEWHERE. As a result, P/E ratios are through the roof due to too much money pouring into the stock exchange.

    Japan may be the example for our future. Once your start QE, you can’t stop because stopping admits you were wrong for years, then the bubble bursts and you have to sort through pain for awhile until the free market fixes itself. Japan cannot stop – they have nowhere else to go with QE – so now the banks who hold all the government debt are buying equities, effectively nationalizing the country. YIKES. It’s Communism in our future. Or maybe I’m just paranoid?

    • Mr.owenr

      After reading Arnold’s autobiography “Swartzenager, education of a bodybuilder” I learned that moving towards specific and calculated self imposed pain is a good thing, because it saves one from a disproportionate amount of pain later on. The American people are a proud and intelligent people who will gladly and willingly endure the pain of free markets correcting themselves after a mistake before they ever fathom intervening in those markets.

      On an unrelated related note,…”Joshua Kennon requires you to verify your email address before posting.” You do? I bet this was just a Disqus thing using your name.

  • The neverending dilemma – the foreign high priced company making high priced high quality items versus the equivalent US company that is more attractively priced making items more for the masses

  • Karen

    This one sounds a lot better than rum raisin, although, have I ever eaten rum raisin anything?? We have an ice cream maker in the basement that sits unused. Maybe we should fire this one up!! Love the info about HSY too. Thank you so much. I love your analysis of the costs as well. Have you ever tried chocolate from Aldi? I had a small Master Roth mint chocolate bar just before sitting down to read your blog. I think Aldi is *wonderful* for many items, some taste better than the store brands. I don’t know if I have seen any plain white chocolate in our stores though.

    • If the alcohol in the rum is not too strong, rum raisin is a fantastic, and definitely distinct, flavor combination. There’s a reason it’s survived from Italy for so long – you get the dark richness of the rum combined with the sweet caramelization of the raisins, which pairs wonderfully with cinnamon, vanilla, and, in some cases, banana and white chocolate. There are rum raisin pies, rum raisin cakes, rum raisin scones, rum raisin breads, rum raisin cheesecake, rum raisin bread pudding …

      What makes it interesting is that 30 years ago, rum raisin was one of the most popular ice cream flavors in the United States. Not having it in your lineup of flavor offerings would have been unthinkable. These days, it’s fallen into near total obscurity in many geographic areas. You still see it in upscale establishments but it isn’t really around much in the mass market. The result is, it has taken on a reputation as an “old person flavor”, as if there were any such thing, assuming a person is familiar with it at all; definitely a culinary tragedy. (Off the top of my head, I only recall seeing it widely available from premium ice cream maker Häagen-Dazs, which has the demographic base to do it. If you want to try it without going to the trouble of making this recipe, pick up a pint, though it’s not nearly as rich due to a lower proportion of heavy cream).

      One old ice cream directory book points out that this happens as people seek variety. According to that particular author in that particular book, in the 1690’s, when the first ice creams appeared in cafes in Paris, people preferred rich, luxurious flavor profiles like candied pumpkin, which appeared in a cookbook at the time. In the early 1900’s, flavors were “[v]iolet, prune, rose petal, and avocado”, which is funny because I was telling Aaron I’d like to find a way to make a prune-based ice cream (the only prune-based food or beverage that has managed to retain it’s popularity across generations seems to be Dr. Pepper, which technically classifies itself as a cherry-family drink in internal documents if I recall correctly, due to the way it is sweetened).

      There are thought to be a lot of reasons this happens. Perhaps technology comes along and makes truly better flavors possible (e.g., how could you have economically produced large amounts of non-egg, safe cookie dough ice cream in 1900?). Perhaps the food giants have utterly ruined the palates of the general public, which now demands sickly-sweet, artificially flavored sugar bombs rather than one or two core flavors that are the focus. Perhaps the winds of fashion exert their powers as they do on dresses, hairstyles, home layout plans, and perfumes, making a new flavor popular. As a result, and older flavor gets lower sales and is dropped until it leaves the collective consciousness of consumers. Perhaps it’s fewer home cooks living on farms of using fresh ingredients, causing people not to associate things like fruit with “real” dessert (look at the hatred fruitcake gets in the United States, which can be traced back to a single Johnny Carson joke since they are preserved and can hold for years without going bad; people repeated it and now talk about how disgusting fruit cake is despite the fact that almost nobody has eaten one if you ask them about it. If you’ve ever had a really good, honest-to-God fruitcake it’s delicious beyond measure in no small part because it can be personalized to your family’s taste preferences).

      I was reading a forum the other day and people were discussing “old people food” that their grandparents and great-grandparents would make; food that they found disgusting. You know what kept getting mentioned? Meatloaf and mashed potatoes. Humans are so fickle; to reject an entire meat and potatoes preparation technique that was applauded and much-loved for generations solely because it is now, in their minds, associated with the elderly.

      I want to try and perfect them all – lavender ice cream, gingerbread and molasses ice cream, lemon ice cream, pineapple ice cream, coffee ice cream, buttered pecan ice cream, cotton candy ice cream, butterscotch rum ripple ice cream, cherry vanilla ice cream, strawberries and cream ice cream, peach ice cream. I want to make real gooseberry fools for dessert. I’m going to go back through the annuls of history, find the best that has been lost to history, then extract and reclaim them as my own, preserving them, if even in a small way, for those who enjoy discovering stuff like this.

      Then again, I’ve conceded that I’m apparently just weird. The dictates of fashion interest me so much. I don’t understand, on an emotional, practical, or intellectual level why don’t people do this more often. When Aaron and I moved off to college, I remember standing in the aisles of Wegmans and having this revelation. “Isn’t it irrational that we simply buy whatever products we grew up with as kids; whatever our moms buy? Shouldn’t we decide what we like best to maximize our own happiness in our household? This is our home. This is our life. We should paint the picture to reflect what brings us the most joy, not inherit all sorts of decisions without examining them.” Around that time, we bought one of every type of tea, one of every type of soap, one of every type of coffee, one of every type of laundry detergent. I took to asking people, “Why do you buy [insert product here]” when we were visiting them and it was almost always, “I don’t know … that’s what my parents bought.” It made me appreciate the power of consumer brands, especially those with reputations that are deserved (e.g., Clorox, unlike some of the cheaper store brands, is less likely dilute the ratio of bleach to water in its product offerings so you are getting more cleaning power per ounce). Benjamin Graham used to talk about this – how the real temptation investors faced was not paying a fair price for a good business that was unquestionably a blue chip but, rather, paying a fair price for a second or third-rate business that will probably get hit hard during times of economic collapse, which he thought should be relegated to either value-based operations or, later when he thought the market had become more efficient and bargains were scarce, through systematic purchases. There’s power in the name “Hershey” or “Coca-Cola”; power that can produce billions of dollars per annum in click-whirl responses, reinforced by all sorts of psychology.

      I’m off on a tangent now (sorry … I get carried away sometimes when I throw myself into a project like this).

      I haven’t had a chance to try Aldi’s chocolate but I’ll try and make a point to pick some up in the next couple of months whenever I’m over by the store. I’ve heard really good things about their stores in recent years; how they have become what Wal-Mart used to be, focusing on delivering the best price with no-frills service. Thanks for the suggestion, I appreciate it!!!

      • joe pierson

        Aldi’s is like a dollar store with meat. It’s great in the sense it is very small so you can get in and out of it very quickly, unlike Wal-Mart with it’s massive parking lot and store. The produce is Wal-Mart quality (not great, nothing like Wegman’s which is probably the best in country). Wal-Mart to Go stores I think are a result of Aldi’s increasing presence in the US.

      • IlovePi314159265359

        I am enjoying the op and the responses here. First, I really like the HSY perspective as I have been watching it for some time. I live down the street from the factory in PA so Hershey is like religion here. Probably 70% of my daughters Halloween candy is Hershey, of which a large portion is the highly-profitable Reese’s variants. I have been trying to find an investment for my daughter to start with ($500) and reinvesting while “giving” her whatever the amount of the dividend is to spend. At the same time I can remind her every time she sees those Hershey bars at Halloween and in peoples houses that some of that money goes to her. We go to the Chocolate world ride many, many times a year (it’s free) and that will help make it “real” for her. I may buy the shares in my IRA, though I plan on picking up a book on taxes and structuring investments hopefully with respect to low income for a child. Unsurprisingly this is a subject of which it is hard to find information!

        Regarding flavors and different quality items, I see the same things others here do. I personally love fruitcake with rum, however it is hard to find. People in my area prefer certain German-inspired flavors and PA-Dutch food. They also like Hershey’s candy to the exclusion of others. There is a local Amish store that somehow gets pounds of Belgian chocolate and bars such as the Lindt white chocolate in the OP. They sell the bars at 3 for a dollar [I have no idea how they are so cheap or why they are at a country Amish store] and no one buys them. I buy some just to put into cookies and such but there are usually plenty left. The Hershey candy they have, which is more expensive, sells in minutes. For the most part though I prefer the Hershey stuff.

        Palates seem to be regional, and around here things I like such as brown bread are unheard of, though some stores carry it. This is all just agreement with other posters here I suppose, however the changing of tastes is interesting.

      • JB

        Joshua, if you ever publish a cookbook, I would buy a copy.

      • engineer7006

        Aldi is also kind of nice because they carry a fair amount of german products.

        • Stephen H

          Global supply chains have finally showed their worth because in Canada I can actually get Haribo gummy bears just about anywhere. Always had to get my mother to grab some when she went back to visit the Fatherland. Even loaded some up myself on a trip. They are just so good, words cannot describe!

      • I think this sentence summarizes a big part of what makes you, you!

        “Around that time, we bought one of every type of tea, one of every type of soap, one of every type of coffee, one of every type of laundry detergent.”

      • Karen

        Quick quick note – I found white chocolate at Aldi, and it doesn’t taste that great. (I will go try Lindt for taste test comparison), but my son commented that the Aldi white chocolate “tastes like cheese”, which I think isn’t the right flavor.

        Anyway, after posting about Aldi I worried it’s too downmarket for you, Kennon, but then again there’s Wal-Mart, not that different (and what do you think of Wal-Mart lately? I”m curious but don’t want to hound you for stock tips that much.) There happens to be another Kansas City blogger who has some nice posts about Aldi. I have only read a couple of her posts, but the blog is called Gimme Some Oven.

        Anyway HAPPY THANKSGIVING to you and yours! Thanks again for the awesome blog and I love it when you ramble, it’s fun and you are so interesting to read.

  • I implore you to try this recipe using Green & Blacks White Chocolate. I’m fairly indifferent to white chocolate but I could eat Green & Blacks by the truck full. The real bits of vanilla bean in the white chocolate is heavenly:

  • Stephen H

    Ugh, now I want meatloaf. I work for an ice cream manufacturer and you’re correct. Flavours like Rum & Raisin and Creme Brûlée are tiny flavour runs now. People want fudge and peanut butter cups. Anything Salty Caramel is a smashing hit in the last little while. Simple flavours are less appreciated which is a shame if your company makes a premium, cream rich ice cream. You lose the subtleties and pleasantries that go with that because your so busy jamming inclusions, flavour bases and ripples in.

    • Steven

      What’s your recommendation for a plain jane icecream brand that would be most enjoyable without all the flavor additives?

      I actually bought some back on the market Blue Bell this week (Texas icecream that had a health scare) in Butter Pecan. I ended up just eating around the pecan and only eating the icecream itself.

      • Stephen H

        That might be a better question for the US readers as I’m posting from Canada so my knowledge is a bit… regional.. to Ontario/Quebec. But something made with real milk and cream with a BF% over 10% or 12% with not too high an overrun (probably not posted on package but if its light and fluffy it means it has a higher overrun, ie, air blended into the ice cream mix) will usually yield creamy results. Sometimes these hidden premium ice creams could be marketed as a French Vanilla so try checking those out also. Either way, exploring ice cream can never be a bad thing (except for your waistline!)

        • Steven

          Thanks, I’ve seen French Vanilla flavor before but never tried one. Might have to give it a go!

      • DP

        If you are wanting premium flavor, your best option will be to visit local ice cream shops that make their own. Here in Portland Oregon we have Salt & Straw (I think they have a San Fran location as well). They make everything they sell: Honey Lavender, Arbequina Olive Oil, Pear & Blue Cheese, Petunia’s Carame Pecan Apple Pie, Spiced Goat Cheese & Pumpkin Pie, and much more. I have tried most of these flavors and they are unlike anything that I will ever find in any grocery store. Someone who treats the process as a craft, and perfecting it for their customers is who you want to get your ice cream from. If you are ever in Portland, try them out.

      • Karen

        Steven, have you tried Edy’s? I like it for basic ice cream flavors, chocolate or vanilla. Should be easy to find.

  • Interesting aside at the end about Federal Reserve policy being the ultimate driver behind suppressed volatility. Actually, that implies that when volatility finally comes, it will be savage, having been pent up that long. I have no idea how you get from here to there, of course.

  • ffc

    Joshua, you write “If you pop up a financial portal such as Yahoo, the Pennsylvania firm looks like it is trading at nearly 40x earnings, or a 2.5% earnings yield, but it’s an illusion. The actual base, real economic earning yield is somewhere around 5% per annum give or take.” Could you please elaborate on that if you don’t consider this to be spoon feeding the reader? I have quickly looked at recent reports, and at least for me it is not obvious that there is a 2.5% earnings yield hidden somewhere. Thanks!

    • The earnings yield is the inverse of the p/e ratio. You calculate it by taking (1 divided by [p/e ratio]). It tells you, “If this company didn’t grow, and I were comparing it to a bond or certificate of deposit in terms of yield, what is the pre-dividend tax yield I would earn on my money at the current price if 100% of the profits were paid out to me, the owner?”. For example, if a company earned $5 per share over the past twelve months and happened to be selling for $100 per share, the p/e ratio is 20 [$100 market price / $5 earnings per share = 20 p/e]. The earnings yield is therefore 5% [1 / 20 p/e = 0.05]. Thus, any returns in excess of 5% must come from growth, financial engineering (e.g., a company like Choice Hotels International recapitalizing itself with debt and paying a massive one-time dividend), or a change in the valuation multiple. That’s very, very useful to know because it forces an intelligent investor to be explicit in his or her assumptions about where the future return is originating.

      The numbers have obviously fluctuated a bit since the post was written, but here’s a screenshot of Yahoo Finance as of 11:49 a.m., CST, Tuesday, November 10th, 2015. As you can see, it appears the price-to-earnings ratio for the trailing twelve months is 37.66, which, if you take out a calculator, corresponds with a 2.65% earnings yield. Were you running a basic stock screener or simply flipping through tear sheets, you’d think the business was far more expensive than it actually is. That is because the trailing twelve months’ reported earnings per share, which sites like Yahoo are using to auto-calculate the p/e ratio, do not accurately represent the long-term earning power of the business as currently presented for a variety of reasons. Therefore, the p/e ratio is overstated and its inverse, the earnings yield, is understated.

      You would need to substitute a more appropriate earnings per share figure based on an analysis of the underlying economic engine, adjusting for things like temporary currency issues, one-time write-offs, etc. Do that and you see that the real earnings yield at the moment is somewhere around 5%.

      (As a matter of fact, less than 60 seconds ago, I had my parents acquire new Hershey shares for their personal, household brokerage account; shares that, all else equal and leaving adequate disclaimer for present unforeseen circumstances, risk management, and/or tax efficiency that may require liquidation in whole or part, I imagine they will own for the rest of their lives. I’m not kidding when I say I hope it slowly drifts its way downward for the next few years, perhaps even ending up at half of its former price or less, giving me an extended opportunity to pick up meaningful amounts for the accounts under my control.)

      • ffc

        Joshua, thanks a lot for your explanation. However, following your approach, I get different results. The reason probably is that I don’t have the deep insights that you have.

        More explicitly, I cannot help taking “Accounting Adjustments That Obfuscate Reality”, “Adjustment Factor for Overfunded or Underfunded Pension”, and “Adjustment Factor for Other Non-Avoidable Contingent Cash Inflows or Outflows” to be zero due to these factors not being explicitly available in the SEC statements and me not knowing how to derive/seek them out.

        I will nevertheless post the results that I get from my calculations, in case someone wants to disagree/criticize/discuss (any such feedback would be very much appreciated!). I have looked at the 10-Q from Hershey filed on 10/30/2015, and also used some historical data to calculate the maintenance capex. Since the 10-Q only covers 9 last months, all the data from it has to be scaled up by 12/9 to extrapolate for the whole year.

        I calculate the maintenance capex in the following way (has Joshua written on this? could not find it!). Average the ratio of PPE to revenue for the last five years (that’s 0.24). Multiply this by sales growth, again averaged over 5 years. This yields the 5-year “growth capex”. Now take the total capital expenditure (average over 5 years), subtract the “growth capex” to end up with the average “maintenance capex” of $210M/year.

        I have used the following numbers to calculate “Stable Cash Extraction Value for an Owner Opting for a 100% Dividend
        Policy of Any Earnings Not Required to Maintain Current Competitive
        Position in the Industry”, as outlined in the relevant post (Mail Bag: Cash Flow Versus EPS for Intrinsic Value Calculations):

        Net Income +399.4
        Depreciation and Amortization +243.8
        LIFO Inventory Reserve Adjustments -284.8
        Required Working Capital +294.7
        Maintenance Capital Expenditures to Maintain Current Unit Output -209.5

        These lines add up to $443.6M . Since the number of the number of shares outstanding is 216M, everything comes down to $2.1/share. Given the price of $85.22, the (e/p) ratio calculated this way is 0.025, which is very close to the earnings yield, and far from 0.05 that Joshua gets..

        • Please forgive the brevity because I’m on a coffee break and don’t have a lot of time to respond to this but, if it helps, the first thoughts I have in 30 seconds glancing over your post include …

          Since the 10-Q only covers 9 last months, all the data from it has to be scaled up by 12/9 to extrapolate for the whole year.

          You can’t do that. (Especially if you were attempting to evaluate a seasonal business. See’s Candies, for example, generates horrific, jaw-dropping losses throughout almost all of the year but makes it all up, and then some, at Christmas and Valentine’s Day, which is why Warren Buffett jokes that the company song is “What a Friend We Have in Jesus”. Hershey is far more stable than See’s so its less egregious in this case but nevertheless important to note in case you try this method again for another firm.) It’s like trying to judge the nature of a forest by the three feet radius surrounding your shoes. Assuming no transformative merger or acquisition, you need to take a 5-to-7 year history, which should, under most conditions, include at least one major recession and expansion. It also allows you to add in one-time events over multi-year periods, which more accurately reflects reality. Significant mergers require more complex analysis as the nature of the enterprise has changed.

          For example, in the first 9 months of the year alone, despite sales being up slightly (despite a stronger dollar depressing them modestly due to the fact it is still mostly a domestic firm), Hershey took at roughly $281 million goodwill impairment charge and an $83 million restructuring charge. That is not indicative of an on-going annual expenditure but, rather, should be factored in over time since that’s when it really occurred; it is simply being recognized in the current period. This wiped out 1/3rd of the reported earnings. If you got your hands on 100% of Hershey’s ownership, you would not be sending $364 million pre-tax per annum out the door. It wouldn’t exist. Thus, the net income figure at even first glance cannot be trusted.

          These adjustments are the result of the final consolidation of the Shanghai Golden Monkey acquisition and some trouble they ran into with the projected sales figures they had used as a result of overestimating the stability of the distribution channels. Historically, this sort of thing has been rare for Hershey.

          Going back to foreign currency, at the rate we’re going now, somewhere between $50 and $75 million is probably going to be wiped off of reported income due to the U.S. dollar being so strong. In other periods, that will most likely swing to a gain. Over time, that matters. At the moment, however, net income is understated further as a result.

          The fact that those non-cash charges aren’t indicative of earning power should have been evident by the fact that the firm routinely returns between $800 million and $900 million to shareholders each year in the form of cash dividends and share buy backs while holding net debt relatively steady over multi-year periods.

          After-tax earnings for the full year 2016 should come in at around $900 million to $1 billion. Even assuming lower than average historical growth in earnings per share, looking 60 months out, it would be well within the realm of reasonable conservatism to project after-tax profits of $1.2 billion, give or take a bit to either side. And those aren’t earnings like they would be from a steel mill or something, as you can tell if you do the owner earning calculation. Practically all of it can be extracted with very little required maintenance; prices can be raised in inflationary environments; sales tend to still do decently even during major depressions or recessions; the business itself is relatively simple without a lot of moving parts (it’s not like an investment bank where you have to worry much about a rouge trader placing super-leveraged bets in the middle of the night).

          The common equity in the business was going for roughly $18.5 billion at the time of the original comment. Relative to the reasonably expected after-tax earnings over the next 60 months, that is a fair price. There is no reasonable way you can reach 2.5% earnings yield on the actual on-going earnings power unless you assume that we were about to fall into a 600-year economic collapse akin to 1929-1933 (and even then, if I had to own equities, Hershey would make the short list).

          Given that things like Goodwill adjustments are fairly basic, from the sound of it, you aren’t sufficiently familiar with GAAP. GAAP, in the United States, is the language of business just as English is the language of the country. You cannot hope to value an enterprise unless you can look at the numbers and feel confident in the earning stream you’re buying; to know how the accountants arrived at the estimates they did and the rules by which they are constrained. I’d temporarily stop with the finance and focus on that. Pick up a really good introductory and intermediate college accounting textbook and read your way through them in a self-study program. Or, alternatively if you don’t need the college credits, ask a professor if you can sit in on his class and explain what you’re doing (you may not even need to audit the course through the university if he or she is amiable to it). In 4 semesters, a single class each semester, you should have a working knowledge with hardly any disruption to your existing career, life, or schedule.

          The reason I say this is because it would worry me if you were buying individual stocks on a valuation basis if you didn’t understand something this basic. (There’s no shame in where you are right now – go back in time a couple of decades and I was in the exact same place. The best heart surgeon in the world doesn’t come out of the womb knowing anything about his craft; investing is no different.) For example, if you look at a real estate development firm, you probably aren’t going to understand that a lot of assets on the balance sheet might very well not be assets at all even though they are called that and increase book value. They are probably past expenditures, including interest income paid to banks and other lenders, that has been capitalized during the development phase. It’s not like buying McDonald’s, where there is all of this wonderfully undervalued hidden real estate on the balance sheet that is carried at a mere fraction of its actual worth. The same goes with capitalized software development costs. How are you going to arrive at a reasonable estimate of future pension costs, which matter? It’d be like trying to count the number of basketballs in a gym, only you have the windows blocked and the lights off. You can’t do it with the sufficient degree of certainty to call it an “investment”. It becomes de facto speculation even if the company itself is otherwise good, unless you are following a Graham-like method of buying a diversified collection of solid businesses over many, many years, knowing that, in the aggregate and as a group, they have historically performed satisfactorily, which you are hoping they do, again; that, like an insurance company writing policies you knew some of which might go bad (such as an Eastman Kodak), on the whole, you should be happy thanks to the mathematics of diversification.

          Enjoy this part of the journey. You’re at the fun early stages where you’re still figuring out how everything fits together. It might seem overwhelming at times, but I promise it’s worth it if you know how to put the skill set to work to serve you and your family. Once you actually get it – once the mechanisms fall into place like a clock – you see how it’s all connected and it’s one of the coolest feelings in the world to be able to look at it, like a mechanic might a car or an engine, and see what’s really happening. It makes the world so much more interesting. You walk into a retail store and start thinking about sales per square foot or demographics of the particular customer base.

          It took 10 to 12 years of total immersion for me to reach that point. I still remember the moment it happened – I was 21 or 22 years old sitting near the front window at Panera Bread on Nassau Street in Princeton, New Jersey one evening right before it became dark outside and it was like a key finally set the tumbler lock off in my head. It felt like everything fell into place and in that single moment, the millions of pages of reading I’d done in the prior decade, the accounting courses, the finance courses, the 10-Ks, the 10-Qs, the biographies, the economic papers, the academic studies; all of it. I’ve never taken a single illegal drug in my life but it was a sensation like those people who describe LSD back in the 1960’s. It was wild as if my mind were expanding; like nothing I’ve ever gone through before or since. I suspect it’s because I was self-taught to a large degree so I had deep knowledge in certain areas but holes in others so when the missing puzzle pieces finally came together, it was already being plugged into a network; a framework that was ready to run. When it booted up, it was like taking control of a stealth fighter. This seems to be a universal thing with anyone who is an autodidact in a particular field. There some brilliant jazz pianists who can’t read music.

          Others I’ve talked to had very different experiences, mostly because (again, I suspect the reasons is) they had traditional academic backgrounds with it so they followed these structured, pre-planned layouts, learning everything sequentially and in tiny bites that built upon each other. For them, it was like a sunrise, slowly happening to the point they didn’t even realize how efficient they had become; how much they knew, or how good they were at the task. This is the only repeatable way to do it and how Aaron and I will teach our kids and grandkids. I lacked the network and opportunity for it so I had to make up for it in my own way, which worked out for me so I wouldn’t change it for the world.

          Enjoy it. Really. It’s so much fun, the constant discovery of some new piece of information. Just wait until you realize that insurance companies can’t be valued properly using GAAP in isolation but, instead, you have to use a special set of accounting rules called statutory accounting, and you don’t want the 10-K’s as much as you want the NAIC filings! I’m getting excited remembering the first time I discovered that, with their yellow cardboard paper covers and legal-size pages. The Schedule D was my favorite part. Or the way to properly analyze a railroad, some of which is with government agencies other than the SEC! I’d bet there are a lot of investors who have no idea that you can pull all sorts of information about companies like Burlington Northern Santa Fe from the Surface Transportation Board, including excel sheets of their earnings.

          You start gathering information, looking at all these different sources, figuring out how the numbers fit together; you see all sorts of things that are out there, in plain sight but almost nobody notices until (and if) it finally gets picked up by the press weeks or months later.

          Though maybe it’s a personality thing. As a kid, along with Monopoly my favorite board game was “Clue”. I loved the movie, I loved the books (there was a series at the time). I loved Agatha Christie’s work. It’s like a real-life detective mystery. You’re trying to uncover the real earnings. The whole thing is a wonderful game only you win real prizes – total independence and the ability to buy whatever you want. You’re learning the rules of the game right now.

          Coffee break over, I need to get back to work. (Please forgive me if this is a bit rambling or contains typos; I’m doing the digital equivalent of thinking out loud as if we were sitting across from each other talking.)

        • ffc

          Very informative answer, thanks! Both your posts and the discussion here is extremely humble and inspiring. Much appreciated.

        • Jeff

          Also, take a look at the ValueLine sheets for a longer term perspective. You can usually access them for free through a university or at your local library.

        • ffc

          Thanks, Jeff! However, it turns out that I don’t have access to any of ValueLine stuff. gives away the 5-year data for free, so I am looking at that for now.

          I am also taking an accounting course from Coursera, which I like very much so far ( At the end of each week they look at a SEC filing and make a connection with the topics covered during that week. Once I feel I know the GAAP basics, I will try to go through the Hershey’s filing again, and try to share what I learn.

          Thanks again for the encouragement!

        • Matt

          I understand the concept of paying attention to changes in sales/earnings in constant currencies, but this is only a relative measure that compares this year’s earnings to last year’s. It does not tell us whether this year’s earnings or last year’s earnings is the “correct” one to use in order to determine our true long term earnings power. It seems like you could make a pretty bad mistake depending on those assumptions.

          How do you calculate the adjustments for currency translation? And how do you determine how what is “normal” for the purposes of a currency adjustment? Is it based on long term average exchange rates (assuming inflation rates are similar)?

        • Steven

          I’ve often wondered this myself.

          If you are looking at a temporary change in currency valuations it makes sense, but if currency values are adjusting as part of a long term secular change it would seem that so called ‘Currency Headwinds’ should not be backed out.

          When we do back them out, aren’t we making the assumption the changes are temporary? If the dollar were to remain at its current strength for the next 10 or 20 years, would we still be saying Hershey gets credit for 50-75 million of temporarily obscured earnings annually?

          I’m not saying we are going to see current USD valuations for the long term, I’m just asking how can we assume we will not?

        • Derek

          Wow! I wish my coffee breaks were as productive.

          I hope some day you will elaborate further on the use of NAIC reports in evaluating insurance companies and translating GAAP results into something more useful for investors.

        • Abe

          “Others I’ve talked to had very different experiences, mostly because (again, I suspect the reason is) they had traditional academic backgrounds with it so they followed these structured, pre-planned layouts, learning everything sequentially and in tiny bites that built upon each other. For them, it was like a sunrise, slowly happening to the point they didn’t even realize how efficient they had become; how much they knew, or how good they were at the task. This is the only repeatable way to do it and how Aaron and I will teach our kids and grandkids. I lacked the network and opportunity for it so I had to make up for it in my own way, which worked out for me so I wouldn’t change it for the world.”

          Broadly speaking, what topics would you have them cover first?

  • art school dropout

    Are there any books that you could recommend as a core curriculum for personal finance?

    • I would recommend simply reading all Joshua’s articles. They are effectively a book. And he did write an actual book a while ago, too.

      • art school dropout

        Good one. I never actually looked at the website even though it is frequently mentioned!!

      • I can attest that the book he co-wrote is a great resource for the beginner. And it’s out of print but you can buy it used on Amazon for dirt cheap.

        • art school dropout

          I looked it up. On my to-do list. Thank you!

  • art school dropout

    I realize that this is not related to the main post, but you take great pictures. You should check out the Light L16 Camera.
    It is much easier to carry around than a standard DSLR and incorporates the next wave of camera technology.

  • Adrian Burns

    “Alternatively, for a young person who has a long run ahead of them and
    who wants to dollar cost average over several decades, the Hershey
    Direct Stock Purchase Plan charges only a $2 base fee + 6¢ per share for
    automatic monthly purchases swept from a linked checking or savings

    Instead of doing the above, I would (and did) go to Loyal3, they offer HSY without any of the above charges and you can invest as little as $10.

  • Stephen H

    How is their regular stuff Kap? Saw it at Shoppers and was going to pick up but hesitated.

    • The milk chocolate bar is good, haven’t tried any others outside of those 2. You’ll need to buy and taste them yourself to judge 😉


    I got paid 104,000 thousand dollars in last twelve months by freelancing from my house and I did that by wor­king in my own time f­o­r few h a day. I was following work opportunity I found online and I am so excited that i was able to make so much money. It’s really user friendly and I’m just so thankful that i discovered this. This is what i do… SECURE37.COM