GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Invest in Hershey for Solid Long-Term Returns

July 18, 2014 | About:
jaggom

jaggom

0 followers

Candy producer Hershey (HSY) has been in the news for the right reasons generally. The organization is seeing development across the globe, posted solid final quarter results as of late, and entered into a partnership with 3d printing organization 3D Systems (DDD) to make 3d-printed chocolate sweet. So, Hershey is looking to bring development to the table in chocolate-production that should help its development in the long run.

Chinese expansion

Going ahead, Hershey is increasing its product offering through both innovations and acquisitions. Hershey will be getting Chinese treat producer Shanghai Golden Monkey Food for $584 million to enhance its position in the Chinese market. Shanghai Golden Monkey has generation facilities in five cities in China, and its products are sold across the country. Also, as indicated by Hershey, Shanghai Golden Monkey's revenue is developing in the twofold digits on a yearly basis.

This is a smart move by Hershey's since the Chinese chocolate confectionery business is an enormous one at $12 billion, with Mars and Nestle (NSRGY) the heading players. So, Hershey's latest acquisition should help it tap this business in a superior manner.

Mars leads the business in China with 40% share, with Nestle coming in next. Nestle is fast developing its presence in the Chinese market. It had opened several factories in China last year, focusing on espresso generation and dairy. Nestle has close to 40 factories in China, which enables it to satisfy developing interest for chocolate consumption in the nation. The organization has seen business beating sales development in the locale, so Hershey's needs to make strong moves in China to have a reasonable effect available.

Taking a look at different regions abroad, Hershey's expects great sales from the Canadian market, where it is the pioneer in confection and mint. In China and Mexico, the positive sales pattern of last year is relied upon to proceed at the end of the day.

Focus on products and advancement

Hershey's is also increasing its product offering by propelling new products such as Hershey's Spreads in the 13-ounce container, Graham Crackers Sticks, Lancaster Soft Crèmes Caramels, York Minis, and so on.

In the sweet, mint and gum classification, Hershey's is picking up great footing, with the class outperforming sales of other snack alternatives such as salty snacks, snack nuts, cookies, and crackers. In addition, the organization performed well in the U.s market and recorded share gains in almost every channel. Hershey's center brands, such as Reese's, Kit Kat, ROLO, and Brookside drove piece of the overall industry gains. Looking ahead, Hershey expects the gum and mint segments to perform well this year also in the wake of recording piece of the overall industry pick up the previous quarter.

Also, Hershey's isn't apprehensive about development. As specified prior, Hershey is cooperating with 3d Systems to create "imaginative opportunities" in 3d-printed nourishment. The two companies have entered into a multi-year understanding wherein both will work to create imaginative ways of making 3d-printed nourishment.

3d Systems' expertise in 3d printing with products such as Chefjet will give Hershey another dimension in chocolate confectionery. 3d Systems had showcased a couple of 3d-printed candies at the Consumer Electronics Show not long ago, made by its Chefjet, and they had a decent taste, as indicated by The Verge. So, this cooperation could end up being profitable for both parties in the long run.

Conclusion

Hershey is making all the right moves. The organization is growing in the lucrative Chinese business sector, extending its product offering up, and is also developing new products with 3d printing. It also expects development in other worldwide markets such as Brazil and Mexico. Besides, Hershey also pays a decent profit with a yield of 1.90%, and alongside a nice anticipated yearly earnings development rate of almost 11% for the following five years, Hershey's looks like a solid investment.


Rating: 0.0/5 (0 votes)

Comments

jtdaniel
Jtdaniel premium member - 3 months ago

Hi Jaggom,

Thank you for the good write-up on Hershey. No doubt about the quality of the company, but I had questions about the valuation. I see that the GF DCF tool shows a value of $43.05 per share, based on anticipated EPS growth of 6.70% for the next ten years. The 6.70% is the trailing ten year earnings growth rate. However, the trailing five year earnings growth rate is a much stronger 16.80%. I ran the same compuation on pre-tax income -- 4.95% growth for the last ten years and 13.52% for the last five years. I also see that you are projecting around 11% growth for the next five years. I was not sure how you arrived at the 11% figure.

Do you know (1) what caused such a significant increase in growth over the last five years and (2) whether the higher growth rate is sustainable? I think the investment thesis turns on these two questions. Thanks again!

petershk
Petershk premium member - 3 months ago

I'm not sure but it looks like EPS took a big hit in 07, and then recovered through 08, and 09. This was primarily a combination of increased SG&A and a decrease in the rate of gross income. You'd probably have to read the 10ks carefully in those years to know why but my guess is they expanded into a contracting period. Thus the last 5 years reflect a high growth in EPS from this period. The years before are closer to current levels.

i can't have confidence in my answer without reading the 10ks but I would assume the 5 year EPS growth in this case is an anomaly. Separate from that are the points in the article around growth in China, Canada, etc. my own view is that I feel pretty sure they have price control in the US and maybe Canada... I have no idea about china, but if they don't and can't get it I would assume they would have to compete on price and then I would think of it as a business with price control buying a company without price control and that can lead to top line growth at the cost of net income. Think about it, if Hershey's can pass on inflation costs in the US but they can't in china, and they invest a few hundred million in China, do you think they will abandon china or will they normalize earnings by redirecting the cash flow from the us to chins in order to "improve that business?" The institutional pressure to make it work can easily overwhelm the reality of capital allocation rationality.

of course if they succeed in doing that, then they could see massive increase but as the article points out they face 2 large competitors as well as god knows how many local incumbents.

I also think about WHY Hershey's has this pricing power in the US. Well... In WWII they got the chocolate contract with the military which means millions of service men and the people they interacted with associated Hershey's chocolate bars with good things and after the war that persisted. It seems unlikely they will benefit from that in china and also unlikely they will find a similar catalyst.

So for me as always it boils down to:

a) what will be their durable competitive advantage (I don't see low price leader, I don't see an obvious brand moat... Of course their could be one, I'm far from expert).

b) how confident am I in my assessment (not very :) )

so I'd wait for another pitch since I'm too lazy to do all the work I'd need to do relative to the certainty I think it would provide.

disclosure: I have spent 0 time investigating Hershey's plans as a company so all this is based on assumptions which can obviously be utterly incorrect.

hermann

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK