Hershey: Strong Product Differentiation And Good Key Ratios

May.20.13 | About: The Hershey (HSY)

The Hershey Company (NYSE:HSY) is a strong contender for long-term success in the chocolate business. The company's products have strong demand in and outside the U.S. In addition, Hershey's financial report reveals several gems, such as its high ROE and ROA. Due to its strong foundation in the U.S., its good key ratios, and a strong focus on global growth, the company's stock qualifies as a good long-term purchase.

Important factors for analysis

Business Model

Hershey benefits from strong product differentiation, technological advancement, and frequent acquisitions in the emerging countries. The company boasts a 43% market share in the chocolate business in the U.S. Hershey's biggest brands are Hershey Bar, Reese's, Hershey Kisses, Jolly Rancher and Ice Breakers. A vast variety of successful products, and high consumer awareness of them, have made the company very strong in the chocolate manufacturing business.

One of Hershey's most popular offerings is the Hershey bar. In a survey published on nbcnews.com, the Hershey Bar is the fourth most popular chocolate in the U.S., in the under 3.5 oz category. The Reese's Peanut Butter Cup, also owned by Hershey since 1963, is number 3 on that list. Hershey's chocolates have been popular in the U.S. for over one hundred years and have carved a strong niche for themselves. The Hershey Bar tastes much different from other similar products such as the Cadbury Dairy Milk chocolate. The Hershey Bar is "more bitter, less creamy than Dairy Milk, and seems to have a grittier texture." Also, "a Cadbury Dairy Milk bar contains 23% cocoa solids, whereas a Hershey Bar contains just 11%." The different taste causes the consumers to make informed choices. People who like their chocolates to be more bitter and less creamy would pick the Hershey Bar. This creates good product differentiation for Hershey.

Hershey is advancing technologically, so as to have operational advantages over the competition. Last year, Hershey opened a new technologically advanced manufacturing unit. Constructed at a cost of $300 million, it is the world's most advanced chocolate making facility. The new technology includes highly automated, large scale 'Hershey Kisses' Chocolate operations. An example of the technology used is real-time diagnostics system to help operations running smoothly for 24 hours a day.

The company is focused on growth outside North America. For instance, "net sales for the businesses outside of the U.S. increased approximately 14.5% in 2011 compared with 2010, reflecting sales volume increases and net price realization, particularly for our focus markets in Mexico, Brazil, China and India." In 2012, 16.1% of the net sales of the company was completed outside of the U.S. As the company introduces more of its products in the foreign countries, the % sales from outside the U.S. would rise significantly.

Cash Reserves

The current ratio at the company is 1.43. The ratio fell from last year's levels due to an increase in the "current portion of long-term debt."

The long-term debt-to-equity ratio is at 1.46. Again, despite the seemingly high ratio, the risk is not high enough to cause major concern. A lower debt ratio would help the company make major acquisitions in the emerging nations. For instance, Hershey could have made a bid for Cadbury in 2009 if Hershey's balance sheet were in a better position.

The company is aware of the need for a good balance sheet, and has significantly improved it over the last five years; 64% of the increase in assets over that time was in Shareholder's Equity. As a result, the debt ratios are lower. A further increase in equity over the coming years would assure the long-term investors of lower risk.

As things stand, the company has done a good job with its capital structure, and can be trusted to do so in the future.

Stock Price

The PE ratio at Hershey is rather high at 29.8. However, this is not a deterring factor considering the potential of the company to achieve high growth in the future, and remain in the business for a very long time. The company seems fairly priced, from a long-term investor's perspective. The stock may or may not fall in the short term, but is a good buy for the long term.

Key Ratios

The company has excellent profitability. It has a profit margin of 10.45%. It also has a very high ROE at 70.48%, and ROA at 16.53%.

The company does not need much debt to earn high rates of return. This is a positive sign since the company is in a position to raise equity, if need be. Also, if the company finds itself in a saturated market, it could decide to increase its dividend payout ratio and still be an attractive asset.

Major Risks

The company must continue to acquire assets abroad. Hershey faces intense competition from global competitors such as Mars, Cadbury and Nestle. Cadbury, for instance, enjoys a 70% market share in India, while Hershey is yet to launch its chocolates in the country. Hershey would need clever marketing and major product differentiation to gain market share in the emerging markets.


Hershey stock is a "BUY" for the long-term investors. The company gains a competitive advantage from its strong chocolate and gum brands. Investors who purchase the stock should expect sustainable growth and long-term stock price rise.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.