Google's KitKat Deal Lessons for Investors

NEW YORK (TheStreet) -- When Google (GOOG) announced this week that it would re-name the next version of its Android software KitKat, after a candy bar, many American outlets got the story wrong.

TheStreet wasn't among them because we went with the press release.

I suspected such a thing would happen because I spent the weekend in York, England, at the Chocolate Museum. The KitKat bar was invented in York, by a candy maker called Rowntree's that wanted something miners could take down for lunch during the Depression.

Rowntree licensed the KitKat name for the U.S. to Hershey ( HSY) in the 1970s, but when the company was sold, in 1988, they sold to its rival Nestle ( NSRGY), although calling Hershey's and Nestle rivals is a bit like comparing York's own League Two Minstermen to Manchester United. The game's the same, it's just played on a different scale.

Nestle maintained the Hershey agreement, keeping the rights in the rest of the world. Hershey's will produce Android-themed candy in the United States and Nestle will do it everywhere else.

You should also know that a Nestle KitKat can be quite different from a Hershey KitKat. Nestle once licensed KitKat to a company called Fujiya, which produced it in dozens of flavors from red bean to wasabi. Nestle bought out Fujiya's KitKat share in 2000, but maintained the strange flavors, and uses flavors like orange in Europe.

Nestle itself is a Microsoft ( MSFT) among food companies, in that it's enormous and into everything. It has a market cap of $207 billion and 339,000 employees, making everything from Purina dog food to HotPockets hand-held snacks to Gerber baby food.

Nestle stock trades like Microsoft, too, heavily but in a fairly narrow range. It had revenue of $101 billion last year, bringing $11.6 billion of that to the net income line, $3.62 per share, so its trailing price-to-earnings multiple is 17.88, well ahead of the software company.

Hershey's is more comparable to Micron ( MU), the memory chip company, because it focuses on one key area, in this case sweets. Its market cap is $20.3 billion, it has 12,100 employees, and it got out of its biggest diversification, the Friendly chain of ice cream parlors, a quarter-century ago.

Unlike Micron, Hershey has been a great investment over the long run, although Micron has jumped almost 140% this year against Hershey's 20%. Since the market lows of late 2009 Hershey is up 153%.

Hershey revenue last year was $6.6 billion, of which it brought $661 million to the net income line, $2.89 per share. Investors are paying a premium P/E of 28.3 for those earnings, which is actually higher than Google's own 27. This might be due to Hershey's tasty dividend, 49 cents per share, giving a yield of 2.15%.

The nature of this deal does say something important, namely that we all look at investment through regional and industry blinders, which we shouldn't do.

Many investors also think of businesses like food as being a fairly staid, low-profit area, while in fact the profits can be fairly fat and the price paid for earnings higher than those of the biggest tech companies. Of all the companies mentioned in this article, the best investment over the last five years has been Hershey.

You can take a lesson from this. If you're a small investor, try a little more diversification, and don't assume that fast change means fat profits. Also be wary of buying Japanese KitKats for your kids, unless they really like red beans and wasabi.

At the time of publication the author held GOOG.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Dana Blankenhorn has been a business journalist since 1978, and a tech reporter since 1982. His specialty has been getting to the future ahead of the crowd, then leaving before success arrived. That meant covering the Internet in 1985, e-commerce in 1994, the Internet of Things in 2005, open source in 2005 and, since 2010, renewable energy. He has written for every medium from newspapers and magazines to Web sites, from books to blogs. He still seeks tomorrow from his Craftsman home in Atlanta.

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