Seeking Alpha
Profile| Send Message|
( followers)  

The Hershey Company (NYSE:HSY) is a great American success story, the origin of which dates back all the way to the late 19th century. In 1894, after years of trial and error entrepreneur Milton S. Hershey created the Hershey bar, a perfect mix of milk, sugar and cocoa. The candy bar was an immediate success and represented America's first serious and large-scale challenge to the master Swiss chocolate makers. Milton Hershey's fame and fortune quickly grew and the company he created endured, prospered and left an indelible mark on the industry and country as a whole.

While originally best known for its iconic Hershey chocolate bar, The Hershey Company has significantly diversified and expanded its brands and product lineup over the years and is now responsible for popular candy names like Kit Kat, Reese's, Twizzlers and York. The company is currently the largest manufacturer of chocolate and non-chocolate confectionery products in North America and has an impressive global reach, servicing consumers in over 90 countries worldwide.

Through its long and storied history, The Hershey Company has become synonymous with the lovable confectionery sweets it has produced for over a hundred years. To investors, however, Hershey should be more synonymous with market-beating returns, as the company's stock has provided investors with almost nothing but dependable outperformance in the past.

Through its unique combination of solid revenue/earnings per share growth and consistent dividend-growth, The Hershey Company has provided investors with a total shareholder return of 170.7% over the last five years, which is equal to an average annual return of 16.1%.

To best illustrate what has been driving these stellar gains in shares of HSY, I will analyze the stock from both a growth perspective and a dividend-growth perspective. As a growth stock, I will analyze HSY based on four main criteria: chart, revenue/earnings per share growth, business fundamentals and valuation. As a dividend-growth stock, I will analyze the company based on both the number of dividend increases over time and the rate at which the company has been growing those dividends.

The Chart:

The main thing a growth investor needs to see from a stock's long-term chart is a consistent uptrend, as this indicates there is a positive growth story intact, anything else is cause for concern on the growth front. Let's first take a look at HSY's five-year chart to ensure it is acting like a proper growth stock should (included are 50-day, 100-day, 200-day moving averages):

(click to enlarge)

(Chart courtesy of Yahoo! Finance)

5-Year Total Return (all with dividends reinvested, numbers from YCharts.com):

HSY: 170.7%

S&P 500: 36.67%

Over the last five years, HSY has easily outperformed the S&P 500 in total shareholder return, besting the major index by more than 130%. The manner in which HSY achieved these gains is even better, as the stock has shown immense strength, trending upwards consistently and largely obeying its major moving averages. Since fully recovering from its financial crisis lows in early 2010, shares of HSY have never significantly broken the 200-day moving average, which is very impressive.

Let's take a look at HSY's one-year chart to see more recent developments and patterns in the stock's trading. The following is a one-year chart of HSY (included are 50-day, 100-day, 200-day moving averages as well as MACD and slow stochastic indicators):

(click to enlarge)

(Chart courtesy of Yahoo! Finance)

1-Year Total Return (all with dividends reinvested, numbers from YCharts.com):

HSY: 43.23%

S&P 500: 13.82%

Similar to the five-year chart, the above one-year chart of HSY is showing strength. The stock has again obeyed its major moving averages well, never coming close to approaching the 200-day MA, and has been consistently trending upwards over the last twelve months. Additionally, the MACD indicates very heavy buying pressure and very weak selling pressure. More recently, HSY is up over 13% during the latest three-month period and well above all key moving averages. From a technical/chart perspective, shares of HSY look very strong.

Growth:

To best illustrate The Hershey Company's growth, I have chosen to compare it to a four comparably-sized companies that operate in similar, albeit not exact, industries: General Mills, Inc. (NYSE:GIS), Kellogg Company (NYSE:K), Kraft Foods Group, Inc (NASDAQ:KRFT), and Mondelez International, Inc. (NASDAQ:MDLZ).

Company

GIS**

HSY

K

KRFT

MDLZ

Revenue Growth (2012)

11.96%

9.21%

7.58%

-1.71%

-2.21%

Revenue Growth (2013)*

5.9%

6.3%

7.4%

2.7%

5.4%

Revenue Growth (2014)*

4.2%

5.8%

3.3%

2.5%

6%

Revenue Growth (3-Yr. Avg.)*

7.35%

7.1%

6.09%

1.16%

3.06%

EPS Growth (2012)

-13.28%

5.47%

12.18%

-8.3%

-11.34%

EPS Growth (2013)*

4.7%

12.3%

7.2%

0.4%

12.9%

EPS Growth (2014)*

8.6%

9.6%

7.5%

12.7%

12.1%

EPS Growth (3-Yr. Avg.)

0.006%

9.12%

8.96%

1.6%

4.55%

(Numbers from Yahoo! Finance, MSN Money, as of 3/17/13)

* Indicates at least some numbers derived from projected analyst estimates in listed fiscal year

** GIS fiscal year ends in May

As the table above indicates, The Hershey Company and Kellogg Company have been/are projected to be the two most dependable stocks with regards to revenue/EPS growth over the most recent three-year timeframe, as they have managed positive growth rates in all listed categories. All other listed companies have, or are projected to have, at least one negative growth rate from 2012-2014.

In terms of revenue, HSY's three-year average growth rate of 7.1% is second only to General Mill's average rate of 7.35%. Looking forward, HSY is projected to see revenue growth of 6.3% in 2013, second only to Kellogg Company, and revenue growth of 5.8% in 2014, which leads all listed competitors.

With regard to earnings per share, HSY leads all listed competitors with an impressive three-year average growth rate of 9.12%; the only competitor even close is Kellogg Company with a healthy 8.96% projected average. In 2013, HSY is expected to see robust EPS growth of 12.3%, far ahead of any listed competitor, and in 2014 HSY is expected to see an impressive 9.6% growth in earnings, behind only KRFT and MDLZ.

When compared to rivals, The Hershey Company stands out as a leader in both sales and earnings growth. Perhaps more important is that HSY has been very consistent in delivering its industry-leading results. Let's take a quick look at the company's growth history for the last five years to see just how reliable HSY's growth has been and how it compares to these most recent growth rates.

Fiscal Year

Revenue

Change (%)

EPS

Change (%)

2007

4.95B

0.2%

0.93

-60.25%

2008

5.13B

3.63%

1.36

46.23%

2009

5.3B

3.31%

1.90

39.70%

2010

5.67B

6.98%

2.21

16.31%

2011

6.08B

7.23%

2.74

23.98%

Avg. 5-Yr. Growth Rate

N/A

4.27%

N/A

13.19%

(Numbers from MSN Money, as of 3/17/13)

With regards to growth, HSY's past five-year performance tells a similar story as its projected three-year performance, in that both are solid and very consistent. With the exception of a major 60.25% EPS drop in 2007, The Hershey Company has managed positive growth trends in all listed categories.

Of particular interest is that revenue growth has been accelerating for the most part very well over the past five years. While sales growth is projected to slow in 2013-2014 from the high levels HSY achieved in 2012, the three-year average growth rate of 7.1% for 2012-2014 is still significantly higher than the company's past five-year average of 4.27%, indicating The Hershey Company is still projected to grow faster on average in the near future than it has in the more recent past.

The Hershey Company's past EPS performance is more volatile as the five-year history begins with a 60% drop in earnings per share for fiscal 2007. After that horrible year, however, the company's EPS growth recovers nicely and manages to stay significantly positive for the next four years. It is important to note that EPS in 2006 was $2.34 and it takes HSY until 2011 to surpass that earnings per share number, a testament to how large a drop 2007 was for HSY in terms of EPS.

When taking the past performance of The Hershey Company into account, the more recent growth numbers look healthy. The company is growing revenue on average faster now than it has in the last five years and its earnings per share growth is projected to remain solid, although down slightly on average.

Fundamentals:

Company

GIS

HSY

K

KRFT

MDLZ

Market Cap

29.9B

18.8B

22.51B

29.86B

50.52B

Total Debt

8.33B

1.91B

7.9B

9.97B

19.49B

Total Cash

734.9M

728.27M

281M

1.26B

4.58B

2013 Projected Revenue*

17.64B

7.07B

15.24B

18.83B

36.65B

ROIC

10.7%

20.4%

10%

8.4%

2.3%

ROIC (5-Yr. Avg.)

10%

18%

12.8%

N.A

2.7%

P/E (NYSE:TTM)

17.06

29.03

23.3

18.28

16.79

P/E (forward)

15.89

21.03

14.95

16.16

16.14

Net Profit Margin

10.56%

9.95%

6.77%

8.95%

8.65%

Dividend/Yield

1.32/2.8%

1.68/2%

1.76/2.8%

2.00/4%

0.52/1.8%

(Numbers from Yahoo! Finance, MSN Money, as of 3/17/13)

* Indicates at least some numbers derived from projected analyst estimates in listed fiscal year

The Hershey Company is the smallest company, as judged by market capitalization, out of all listed competitors. However, the company also has the smallest amount of debt, in both absolute terms and in relation to market cap. At $1.91 billion, HSY's total debt is equal to only 10.15% of the company's current market capitalization, which is minimal especially when compared to the high levels of debt its peers carry. Additionally, HSY has one of the largest cash positions in relation to market cap, as its $728.27 million in cash, equal to 3.87% of the company's current market capitalization, is behind only KRFT and MDLZ. Taking a look at HSY's debt history, it appears that the company has not significantly increased it debt load since 2008, a very healthy sign.

The Hershey Company also leads all of its competitors when it comes to the all-important return on invested capital metric, which effectively measures how well a company invests in its own operations and generates returns off of those investments. A consistently high ROIC number indicates a management team that is very dedicated to generating efficient returns from capital. HSY's ROIC is a robust 20.4%, which is nearly double that of the next best company. Additionally, the company's five-year average ROIC is an impressive 18%, which indicates that management has done very well managing capital investments in the past and should continue to do so going forward.

HSY also boasts one of the best net profit margins out all listed companies. At 9.95%, the company's net margins are behind only that of GIS. Moving on to valuation, Hershey appears quite expensive with both the highest trailing twelve-month P/E and the highest future twelve-month P/E, at 29.03 and 21.03 respectively. When judged on a historical basis, the stock appears more reasonably priced as its forward P/E of 21.03 is a bit cheaper than its five-year average P/E of 22.12.

HSY's dividend of $1.68, equal to a yield of 2%, is impressive although it pales in comparison to the majority of its peers; only MDLZ has a lower yield, currently at 1.8%. However, the more interesting story is in the growth of HSY's dividend over the years. Let's have a look:

Dividend Growth:

Company

HSY

Price Per Share

83.90

Dividend

1.68

Yield

2.00%

Payout Ratio

54%

Dividend Increases In Last 10 Years

9

% Increase In Last 10 Years

156.09%

Annual Dividend Growth (10-Yr. Avg.)

9.6%

Dividend Increase In Last 5 Years

4

% Increase In Last 5 Years

40.93%

Annual Dividend Growth (5-Yr. Avg.)

6.6%

Dividend Increases In Last 3 years

3

% Increase In Last 3 Years

31.25%

Annual Dividend Growth (3-Yr. Avg.)

9.4%

Most Recent Dividend Raise

11/20/12

Most Recent Dividend Increase (%)

10.52%

(Numbers Yahoo! Finance, Dividend-Stocks.com, as of 3/17/13)

The yield on shares of HSY, currently 2%, is towards the higher end of the spectrum among dividend-growth stocks, judging from the handful that I have analyzed recently. However, at 54%, the payout ratio is also higher than the majority of dividend-growth stocks that I am familiar with, as HSY pays out over half of its earnings to investors in cash dividends.

HSY has been very consistent with increasing its dividend over time, averaging just less than one increase per year for the last decade. By managing an average annual dividend-growth rate of 9.6% over the last ten years, HSY has increased its dividend 156.09% in that time. However, that average annual dividend-growth rate slows to 6.6% over the last five years, as the company managed to grow its dividend 40.93% since 2008.

More recently, HSY increased its dividend by 10.52% towards the end of 2012. This latest increase is well above the company's five-year average growth rate of 6.6% and, together with HSY's higher 3-year annual dividend-growth rate of 9.4%, indicates that dividend-growth is starting to accelerate as of late. The rate at which the company is increasing its dividend is also accelerating; as HSY has managed a dividend raise every year for the last three years.

The dividend-growth numbers at The Hershey Company are admirable but nowhere near the strongest that I have seen. Companies more traditionally known for their dividend-growth like VF Corporation (NYSE:VFC) and W.W. Grainger Inc. (NYSE:GWW) beat HSY in terms of both the frequency of dividend increases and the rate of growth (click on the corresponding ticker to view my previous articles on the respective dividend growth of each: VFC, GWW).

While not near the best levels seen among dividend-growth stocks, The Hershey Company has done a solid job of consistently raising dividends for investors throughout the years. Perhaps more encouraging is the fact that both the frequency of dividend increases and the rate of dividend-growth are both accelerating, a very promising trend for the future.

Growth Catalysts:

The Hershey Company ended 2012 with a very strong Q4, a quarter in which net sales grew 9.3%, above management's expectations, on strong volume growth of 7% (excluding acquisitions). For the entire 2012 year, net sales for HSY also grew 9.3% and adjusted earnings per share grew 14.5%.

HSY's impressive growth last year was due in part to a strong performance in the company's chocolates/sweets/refreshment category in The United States, which grew 5.2% in 2012 and was primarily "driven by investments in the form of both innovation and advertising," according to President and CEO John P. Bilbrey. The struggling chewing gum category, which was down 5.5% in 2012, was a drag on the growth of the company's US candy, mint and gum business, but the segment still managed to grow within its 3%-4% historical average.

The company also managed to pick up domestic market share in key areas throughout 2012, including the crucial Halloween season where HSY gained 0.8% market share from its competitors. More importantly, in its primary growth channel in The United States (food/drug stores, military/club), which accounts for approximately 90% of the company's domestic retail sales, HSY's market share was up 5.7% for the year.

The Hershey Company's ability to steadily grow its sales and expand market share domestically is crucial because it is this solid positioning in The United States that gives the company "flexibility to invest in key international markets," CEO Bilbrey stated in the latest conference call. Despite constant foreign currency headwinds, HSY grew net sales outside of The United States and Canada an impressive 12%. Sales in China, Brazil and Mexico exceeded management's expectations, "with local currency sales up double digits on a percentage basis versus last year."

Management expects this prevailing momentum in growth to carry over into 2013 and is forecasting net sales growth of 5%-7% and adjusted diluted earnings per share growth of 10%-12%. Starting with domestic, management expects the company's CMG category of products (candy, mint, gum) to grow between 3.5%-4.5% in 2013, up from 2012's 3%-4%.

Management also expects to start seeing significant/expanded growth from its Brookside product line, which HSY acquired in late 2011. CEO Bilbrey explained, "Brookside has increased sales at a compound annual growth rate of about 20% over the last several years. With our additional manufacturing capacity now online, Brookside 2013 net sales growth will exceed this historical CAGR." Bilbrey went on to explain that several new products in the Brookside lineup, which are predominantly chocolate-covered, fruit juice-filled assortments, already began shipping to retailers in early January.

Management's hope for the Brookside lineup is not to just increase sales to new customers but to serve the unmet needs of the company's repeat customers through product innovation. A full-scale television advertising campaign, complete with high-profile taste testing and in-store merchandising, was scheduled to begin in February. Think of this part of HSY's business as an historically well-performing brand with some serious muscle behind it now. With more manufacturing capacity available, Brookside is set to grow above a 20% CAGR in 2013.

Additionally, CEO Bilbrey made reference to a few interesting advertising opportunities The Hershey Company will stand to benefit from in 2013, including the company's annual Reese's NCAA college basketball partnership and a special Twizzler promotional campaign tied to the upcoming Zach Snyder Superman movie, Man of Steel. Finally, the company is set to release many new product spin-offs in 2013 including Kit Kat minis and Twizzler Bites.

Shifting to international markets, management at HSY expects to see a significant increase in net sales outside of the US and Canada, in the range of 15%-20%. This growth, which is dependent upon current exchange rates, should keep The Hershey Company on track to reach its milestone of $1 billion in international net sales by late 2014. The key drivers of growth for HSY in international markets are distribution gains and repeat purchases by consumers, and management sees both trends continuing to accelerate going forward.

In China, management is ready to capitalize on the success of the Hershey's brand by extending the product lineup throughout 2013 to include Hershey's Kisses Deluxe and Hershey's Drops. In Brazil and Mexico, the company's chocolate businesses continues to grow at impressive rates and management is set to expand the company's brand portfolio in both countries with broad launches of new products like Hershey's Mais, which CEO Bilbrey stated will be supported by "significantly higher media and brand-building initiatives."

Risks:

One of the major risks to The Hershey Company's continued growth is a major downturn in consumer sentiment/spending trends. As with most consumer goods/food retailers, a general downturn in spending can create serious pauses in the growth channels of companies like HSY and this will remain a constant risk for investors in 2013 and beyond.

Additionally, as management explained in the latest conference call, there is a risk that foreign currency exchange rates can negatively impact net sales growth outside of The Unites States, as was the case for The Hershey Company during the last few quarters. In 2012, foreign currency exchange rate headwinds accounted for a drop of at least 3% in total net sales growth outside of The United States and Canada and this will most likely remain a risk for investors going forward.

Conclusion:

The Hershey Company has done very well for investors over the years through a unique combination of revenue/earnings per share growth and dividend-growth. While not robust in either regard, HSY stands out because it performs admirably in both categories and offers investors the best of both worlds: market outperformance and reliable income.

HSY is well positioned domestically, steadily gaining market share and expanding revenue streams by offering new product innovations that capitalize on the popularity of the company's powerful brand names, and is poised to continue to expand overseas in a similar, methodical manner. As such, revenue and EPS should continue to grow at solid, although not necessarily robust, rates in the future. On the dividend front, the company's yield of 2% is strong and the stock's dividend-growth is accelerating faster than it has in the more recent past. I believe investors can continue to expect increasing dividends from HSY going forward.

One of the few negatives with shares of HSY is the current valuation, which is well above its historical average. Even though HSY's forward P/E is inline with the stock's five-year average P/E, this pricing leaves little room for error and as such does not represent the best entry point for investors. I recommend buying shares of HSY on any pullback that allows the stock's valuation to become more enticing. If presented with better multiples, investors should consider sweetening up their portfolio with shares of The Hershey Company.

Source: The Hershey Company: A Sweet Investment