Hershey Company (HSY) known for its sweet confections announced on Monday cost cutting measures that will trim 500-600 jobs from their operations or somewhere around 5% of total headcount. Furthermore, the company plans to spend about $250 million to $300 million modernizing and expanding some of their factories to help them compete on a global level, as competitor Cadbury was recently bought by Kraft (KFT) creating a global chocolate force. Most of the budget for facility expansion will be destined for Hershey’s West Hershey, PA plant. Current estimates show this “realignment” saving between $60 million and $80 million annually, but those savings are not expected to be realized until 2014. In the interim, the company is estimating initial restructuring costs of $140 million to $170 million over the next three years.
Obviously, Hershey’s is feeling the pressure to up their game as they are comparably much smaller than the soon to be combined Cadbury and Kraft venture, and Hershey’s has termed this effort the “Next Century” project alluding to the future of the company. The reduction in headcount will come from Hershey’s more than a century old plant in Hershey, PA and they will shift more production to its newer plant in West Hershey built in 1992. Interestingly, as the company undertakes this expansion of its facilities and distribution channels it is also firing a sizable portion of its workforce. Perhaps it sees the reduced headcount as a way to better handle financing the expansion, and it may slowly hire workers back as conditions warrant. The company also reaffirmed previous guidance to come in right around analysts’ estimates when excluding charges: EPS of $2.47 to $2.52 and sales growth of 6% to 7%.
Hershey’s stock opened this morning slightly higher and has tailed off through the morning, but for the year the stock has appreciated 42% already. Hershey’s performance trounces that of the broad market index as the S&P 500 has fallen about 1.5% so far in 2010. As of this week, we have reaffirmed our Fairly Valued or neutral rating on HSY shares, but according to our methodology the stock is starting to look overbought. For example, over the past ten years HSY has historically traded for 18.7x and 25.8x times cash earnings, but at the current price level it is near the high end of that range at 22.7x. Furthermore, the current price-to-sales multiple of 2.05x is above the historically normal range of 1.47x to 2.0x. Based on these and other fundamental valuation metrics, we may be inclined to downgrade Hershey to Overvalued in an upcoming report.
The company is facing a tougher global competitive landscape with Kraft targeting the confectioner market, and they are forcing Hershey to jolt into action. The “New Century” restructuring effort is likely necessary to compete, but it will also be costly in the near term. If the stock was trading in the low $40’s it would be one thing, but the stock has already performed very well lately and we cannot get excited about this stock at the current price level.