Dueling Fools
Hershey My Way
August 25, 1999
Bull Argument
By
Kit Kats. Skor Bars. Good & Plenty. York Peppermint Patties. Heath Bars. PayDay. Jujyfruits. Peppermint Patties. Twizzlers. Reese's peanut butter cups. Jolly Rancher. Almond Joy. Milk Duds. Hershey Kisses. If you're a red-blooded American, you recognize most, if not all, of the preceding brand names. They represent just a partial list of the products in the Hershey portfolio that have made boys and girls of all ages smile over the years.
More importantly, they have given the company's shareholders much to smile about. Little should change through the coming decades as children will continue to relish Hershey's sweet products and investors will continue to reap the benefits of the company's constant and predictable profits.
Hershey is the country's largest maker of chocolate and related grocery products. (It's so large that it's based in its own town: Hershey, Pennsylvania.) With over $4.2 billion in annual sales, Hershey is nothing short of an American institution. It's a firm with simply awesome brand names that should be able to continue to profitably sell its products for the foreseeable future.
Hershey is sold in over two million retail outlets in North America. That's a channel of distribution that's as powerful as the mighty Mississippi. Simply said, Hershey has a brand that is extremely well-recognized throughout our society. I don't see any hotshot candy upstarts taking away Hershey's market share anytime soon. In fact, Hershey has been actually growing its share of the confectionary market through the year, adding to its already impressive lead.
Hershey isn't like a sexy Internet stock. In fact, Hershey is more like a chocolate cash cow. While the company does have modest growth overseas as the developing world becomes accustomed to the company's products, the fact is that Hershey's sales are extremely steady. Of course, this means there is little growth, but it also means that Hershey should be able to continue to churn out candy-coated and predictable profits.
Hershey is one of the best defensive stocks to own on the market. No matter what the economy does or what new technologies come about, chances are that folks are still going to buy their Milk Duds and chug their Hershey chocolate milk. Not many other companies can boast the type of sales and earnings safety that Hershey can.
As a defensive company, Hershey's earnings should be valued higher than those of companies with much less predictable profits. For the full fiscal year, Hershey is expected to earn $2.38 per share. For the year 2000, Wall Street expects Hershey to produce $2.60 in earnings. That means Hershey is trading at about 21x forward earnings, a discount to the average stock in the S&P 500. I think Hershey has a little room for multiple expansion given its quality of earnings.
After all, not many other companies can boast the type of profit history that Hershey can. The data I have only goes back to 1987, but the company has earned a profit in every single year during that time. Every single year over the past 12 the company has earned at least $140 million, and some years much more. Hershey has also paid a dividend in each of those years. Beyond a one-time increase in 1990 that was later scaled back, Hershey has consistently increased its dividend.
Even if Wall Street doesn't bid Hershey's stock up, investors have the juicy dividend that Hershey pays out. The stock currently yields 1.9%, which is fairly hefty by today's standards and sweeter than a Hershey Kiss. One might say that both the earnings and the dividends are Good & Plenty.
It's also worth considering the share buybacks that the company has undertaken. By using some of the extra cash flow generated to repurchase shares, the company is reducing the total shares outstanding while making the existing shares that much more valuable. All else equal, the buyback should give a caffeinated boost to per-share profit growth. Also, the share repurchase program represents the board's confidence in the company's health.
Frankly, Hershey's stock is about as blue as a blue chip can get. It may not be terribly exciting, but it's as solid as a rock. I'm interested to see what (if any) sour milk my associate Bill can dig up on this fairly tasty company. Hershey looks to be the perfect stock to build a portfolio around and should give Foolish investors positive returns over the next millennium.
Next: The Bear Argument