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.