Topic: Growth Stocks

Hershey Co. is expanding its appeal

A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company known for its chocolate and non-chocolate confectionery products.

Pat likes the company’s steady growth. It’s also diversifying with what appear to be smart acquisitions. However, he cautions that the firm faces challenges from rising labour, ingredient and transportation costs.

Hershey Co. (Symbol HSY on New York; www.hersheys.com), is the largest U.S. producer of chocolate and non-chocolate confectionery products.

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Major brands include Hershey’s, Reese’s, Kisses, Cadbury, Ice Breakers, Kit Kat, Almond Joy, Jolly Rancher, Twizzlers, Good ’n’ Plenty, Heath, Whoppers, and Milk Duds.

On November 10, 2021, the company announced it would pay $1.2 billion to acquire two firms: Dot’s Pretzels LLC, the owner of Dot’s Homestyle Pretzels; and Pretzels Inc., which handles some manufacturing for Dot’s as well as third parties.

The estimated sales for the two businesses were $275 million for the 12 months ended September 2021. Dot’s is the fastest-growing pretzel brand in the U.S.—it accounted for 55% of the pretzel category’s revenue growth in the past year. In just five years, the company has captured 9% of the $2 billion U.S. pretzel market.

The acquisitions are Hershey’s second largest to date, behind only the $1.6 billion it paid in 2017 to buy Amplify Snack Brands, the parent of Skinny Pop popcorn.

Hershey has grown steadily over the last five years. The company’s revenue rose 19.4% from 2017 to 2021. That’s up from $7.52 billion to $8.97 billion. Earnings per share climbed 51.1%, from $4.76 to $7.19, as the company introduced more high-profit-margin products.

Inner Circle: Earnings are strong and acquisitions should keep helping

The pretzel acquisitions are aimed at expanding Hershey’s growing lineup of salty snacks, which includes Skinny Pop popcorn and Pirate’s Booty cheese puffs. This will let the company continue to diversify beyond its core confectionery products.

Hershey’s outlook is positive. It should build on its strong brand portfolio and focus on innovation with new products such as salty snacks and sugar-free confectionaries. However, like a lot of manufacturers, in the near term, it will continue to face challenges from rising labour, ingredient and transportation costs.

Meanwhile, though, the stock is up 22% over the last year, and the shares now trade at a high 29.1 times the forecast 2022 earnings of $7.50 a share.

Recommendation in Pat’s Inner Circle: Hershey Co. is a hold.

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