Q: Dear Pat: I have followed Hershey for several years but never invested in it. To me, it looks like a solid company in a boring but stable industry. I would appreciate your advice. Thanks.
A: The Hershey Co. (symbol HSY on New York; www.hersheys.com) is the largest maker of candy and other sweets in the U.S. Its major brands are Hershey’s, Reese’s, Kisses, Kit Kat, Jolly Rancher, Twizzlers, Mounds and Milk Duds.
In the three months ended December 31, 2014, Hershey’s revenue rose 2.7%, to $2.01 billion from $1.96 billion a year earlier. Excluding one-time items, earnings per share gained 20.9%, to $1.04 from $0.86. Earnings rose faster than revenue because the company was able to raise its prices while cutting costs.
Hershey holds cash of $472.0 million, or $2.95 a share. Its $1.5 billion of long-term debt is a low 6.7% of its $22.3-billion market cap.
Latest Hershey acquisition plans to make jerky a gourmet snack
In February 2015, the company announced plans to use simpler ingredients in response to consumers’ shift toward more natural and locally sourced foods. The move came a day after the U.S. division of Swiss rival Nestle announced a similar plan.
Hershey’s new ingredients include locally produced milk and almonds from California. The company will also use more non-genetically modified sugar and milk from cows that haven’t been treated with hormones. As well, it will avoid artificial flavours and colours.
Meanwhile, Hershey will keep adding new products through acquisitions. Its latest was jerky maker Krave in January 2015 (jerky is dried meat, such as beef, turkey or pork, with added flavourings). Krave aims to make jerky a gourmet snack food. Its flavours include black cherry barbecue, basil citrus, garlic chili pepper and pineapple orange. The deal’s terms weren’t disclosed.
This was Hershey’s first acquisition since late 2013, when it bought a majority share of Chinese candy maker Shanghai Golden Monkey Food Co. for $584 million. That deal seems to be paying off: Hershey’s China sales will likely jump 35%, to $450 million, in 2015, making China the company’s second-largest market by the end of the year.
The stock trades at 22.8 times this year’s forecast earnings of $4.50 a share. It yields 2.1%.
Inner Circle recommendation: a hold.
