Hershey (NYSE: HSY) is the foremost North American manufacturer of chocolate and non-chocolate confectionery and chocolate-related grocery products, and a major player in the gum and mint group. I believe the company has five core strengths that make it appealing to buy and hold investors.
Impulse Driven Sales
Hershey's offers an abundance of "grab 'n go" products that consumers buy on the fly. The company garners significant sales from consumers who often do not even plan on purchasing its products. Yes, "planned purchases" are also a considerable part of its business. However, Hershey obtains impulse sales from aggressive retail marketing. Affordable price points, compared to prices of other 'discretionary spending' items also drives Hershey sales.
Its products stare at consumers from checkout area displays, peg board displays, end-of-aisle displays, and such, in big-box stores, supermarkets, convenience stores, and more. Consumers may not always have a specific intention to buy Hershey's products when they plan a shopping expedition - but they do buy the company's products regardless.
Important for investors to note is that Hershey's strategic retail marketing, which results in those impulse sales, helps the company maintain consistent sales year-round, in between those high sales seasonal periods (Halloween, Christmas, Easter, Valentine's Day).
Core Brands Gaining Market Share
Mr. John P. Bilbrey, Hershey CEO, President and Director, said in a July 25, 2013 Earnings Call concerning the company's 2013 Q2 results, "Core brands such as Hershey, Reese's, Kit Kat, as well as Brookside, all gained share."
The company's still extracting maximum value from its storied brands that appeal to all age groups and demographics.
There are three points to consider pertaining to Hershey's management.
- The company is obtaining good return from its assets. Its Return on Assets (ROA) is 17.09%. This indicates a first-rate management team that's utilizing its invested capital effectively to produce net income. The ROA for major competitor Mondelez (NASDAQ: MDLZ) for the trailing twelve months is 2.96%.
- Company management is assertively pursuing new markets. As CEO Mr. Bilbrey further noted in the aforementioned Earnings Call, "Additionally, work is underway to determine opportunities outside the U.S. and Canada. Grounded in consumer insights, validation work has begun in select geographies to determine which countries offer the greatest payback and the timeline for entering these markets."
- Hershey appoints top-notch Board of Director members. Consider the company's latest appointment: Mary Kay Haben. When she retired in 2001, she was President, North America of Wm. Wrigley Jr. Company, (a subsidiary of Mars, Incorporated). Investors can take away that there's significant confections business knowledge and expertise now added to Hershey's Board.
Hershey's trailing twelve month (ttm) profit margin is 10.65%. Its ttm operating margin is 18.74%. How does this compare to one of its major competitors in the Confectioners industry in the Consumer Goods sector? The ttm profit margin for Mondelez is 6.74%; Mondelez's ttm operating margin is 11.39%.
As an addendum, profitability results in regular dividend payments and increases. Hershey has consistently increased its dividend payments since 1985 (August 19, 1985: dividend $0.02916). The company recently boosted its quarterly dividend by 15.5% to 48.5 cents per share on its Common Stock. This is the 335th consecutive regular dividend on its Common Stock.
Growth Initiative: New Brand in a New Market
Hershey is thinking outside the chocolate box so-to-speak. For the first time in its history the company has launched a new brand outside its home turf, the U.S.
Hershey announced in May 2013 a new candy brand for the People's Republic of China (PRC), which they branded "Lancaster™". The Lancaster™ products will contend with traditional candies in the PRC's "milk candy" confection category.
Important for investors to consider is that China is where Hershey is looking to grow sales and market share. According to the company's May 21, 2013 press release, "China plays a critical role in the company's long-range growth vision which includes reaching $10 billion in worldwide net sales by 2017."
Of Note: A Challenge that Hershey and other Confectioners Face
With these above-mentioned five strengths, Hershey (and others in its industry) does face a major challenge. It's something investors must consider when performing due diligence on confection companies.
This challenge is the potential for chocolate shortages. This will drive up cocoa prices and put pressure on Hershey and others in the industry to raise retail prices because of higher input costs. With that, there is always the risk of some consumer resistance. It won't overwhelm Hershey, but it is a factor to consider when researching the company.
An article in The Economic Times (Jan. 2011) noted that, "The world is facing a "chocolate drought", according to an expert, whose warning is prompted by fears that the globe's sustainable cocoa supplies could be exhausted by 2014."
Furthermore, Bloomberg reported on August 15, 2013 (Isis Almeida & Marley DelDuchetto Kayden), "Cocoa is heading for its best quarter since 2009 as dry weather and crop delays in West Africa, the main growing region, send prices toward a two-year high and raise costs for chocolate makers."
I believe Hershey is a solid company that income investors should consider when desiring a stable revenue stream. Just like General Mills (GIS), which I focused on in a previous article, Hershey (established in 1894) also has a rich history of strong performance. The company, like GIS, has seen it all over the years and has weathered economic volatility and continues to forge ahead aggressively as a consumer goods stalwart.