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I've grown accustomed to living in foreign countries, and pride myself on adjusting quickly and easily to each new place. With the internet, one's never far away from everything, anyway, and I've not yet lived in a place so exotic that the supermarket can't cover most of my limited needs - bread, eggs, cereal, chicken, and veggies, and I'm ok.

There's one exception to that stance, one item from home that I miss more than any other: peanut butter in general, and especially Reese's peanut butter cups. I've been a rabid peanut butter consumer my whole life; as a kid, I was obsessed with the quest to disprove the idea that, "There's no wrong way to eat a Reese's," as the ad campaign went. After countless hours of firsthand scientific observation and dedicated research, I came to the conclusion that indeed, there was no wrong way to eat a Reese's (though scooping out the middle to leave a chocolate ring on the outside was one of the best).

It is only as an adult living out of the U.S. that I have learned how wrong my childish conclusion was. There is a wrong way to eat a Reese's after all: move to Europe, where they're not sold. Ok, maybe in the specialty stores catering to Americans whose urges must be met at any price I could find them, but then what's the point of being abroad? Maybe in Israel, too, where a large percentage of the resident and tourist population is from America and where you can find Reese's in kiosks. But here on the continent, the marriage of milk chocolate and peanut butter in perfect circular form that for some offers proof of a higher intelligence and for others proof of the correlation between calories and weight gain is all too hard to find.

All that is a long-winded way of explaining why I became interested in looking at Reese's producer Hershey's (HSY) as a stock: first because I wondered why the company does not sell its products in Europe, and then because I hoped shareholders might get free candy packs as a special dividend.

To quote the company's website, The Hershey Company, "is the largest producer of quality chocolate in North America and a global leader in chocolate and sugar confectionery." Hershey's brands include the eponymous milk and dark chocolate bars, Hershey's Kisses, Almond Joy, Mounds, Twizzlers, the U.S. rights to Nestle's (OTC:NSRGY) Kit Kat, and of course, Reese's. The company focuses its business on North America, though it does have international operations in China, Brazil, Korea, Japan, and India (just not Europe).

The company's performance has been strong in these tumultuous times. The stock has hit or beat earnings estimates every quarter since at least the crisis (per TDAmeritrade's data). For the first quarter of 2012, the company beat narrowly, but then raised earnings outlook from a $3.08-$3.14 range for adjusted EPS to a $3.11-$3.17 range and organic sales growth outlook up a half a percent to 5.5%-7.5% (7%-9% including the newly acquired Brookside Foods). The stock reacted positively, and is up 9.16% from that earnings report and 9.5% year-to-date.

The highlights of the Hershey's story include stabilizing or dropping commodity costs - cocoa, among other things - that help the company increase its margins. First-quarter adjusted gross margin for Hershey's was 44.2%, 180 basis points better than Q1 2011 and 250 basis points better than Q4 2011. The company expects 90-100 basis points improvement on its full-year adjusted gross margin, which was 42.4% last year. Some analysts see this guidance as conservative, and it should be noted that last year's Q1 adjusted gross margin ended up being the same figure as the company's 2011 year-end gross margin.

There is also safety from Europe. Whether due to a missed opportunity after World War II, the realization that Hershey's chocolate wouldn't cut muster against better local brands (many owned by rival Kraft Foods (KFT), or just a lag in a plan that will come into action soon, Hershey's does not sell many goods in the Old World. Which, considering the ongoing turmoil in the eurozone, has proven to be a prophetically bold stroke of genius. Management knows it, too: CEO John P. Bilbrey said on the Q1 conference call, "There's (sic) 5 or 6 markets around the world that have GDP growth of greater than 5%, some significantly greater than that. And those are really the markets that we're focused on." This focus on growth markets seems wholly logical, even if chocolate is the ultimate secular, inelastic purchase.

The final attraction for Hershey's as an investment is its dividend. While the company lost its dividend champion status due to keeping the dividend level unchanged in 2009 (David Fish ranks it a "Frozen Angel"), the company has raised its dividend 35 out of the past 36 years. Additionally, since the stock's first big move out of the dregs of the financial crisis, which it made in early 2010, Hershey's has not traded at higher than a 2.86% yield, suggesting a solid dividend floor (with the current dividend, this would hit around 53). At Thursday, May 24's close Hershey's offered a 2.23% yield, hardly enormous, but not shabby either.

Like the nutrition label on a package of Reese's cups, however, there lingers a downside for Hershey's stock. Just as one has to pay for high-quality peanut butter/milk chocolate goodness with a bit of his/her health, so an investor has to pay for this steady, quality, U.S. focused growth with a high valuation.

(Sources: TDAmeritrade, WSJ, Bloomberg)

As of Q1 2012

HSY

KFT

SLE

SJM

K

NSRGY.PK

Market Cap

$11.1B

$68.6B

$12.4B

$8.7B

$17.9B

180B CHF

Quarterly Revenue Growth (Y-over-Y)

10.74%

4.13%

-14.5%

11.90%

-1.30%

5.40%

Linked Quarterly Revenue Growth

10.52%

-10.90%

-8.80%

-3%

14.10%

-5.80%

Yearly Revenue Growth

7.23%

10.48%

-19.6%

4.80%

6.50%

-4.90%

EPS Growth (Annual)

14%

6%

-3.45%

13.44%

5.20%

NA

Estimated Earnings Growth (next 3 years)

10.46%

10.87%

16%

6%

6%

15.40%

Earnings 2011

2.82

2.29

0.78

4.81

3.38

2.96

Earnings 2012 (Est.)

3.21

2.52

0.92

4.67

3.36

3.63

Earnings 2013 (Est.)

3.54

2.80

1.04

5.25

3.63

3.93

Free Cash Flow/Share 2011

1.01

1.55

0.15

1.81

2.75

1.48

2011 P/E

24.11

16.9

26.71

16.1

14.85

18.46

2012 P/E

21.18

15.35

22.64

16.58

14.94

15.06

2013 P/E

19.21

13.82

20.03

14.75

13.83

13.91

PEG Ratio

2.31

1.55

1.67

2.68

2.48

1.2

2011 P/FCF

67.33

24.96

138.87

42.78

18.25

36.93

Price (May 24th Close)

68

38.69

20.83

77.44

50.2

54.65

Dividend (Yield %)

$1.52 (2.24)

$1.16 (3%)

$.46 (2.21)

$1.92 (2.48)

$1.72 (3.43)

$1.95 (3.57)

(Note: Nestle's figures are in Swiss Francs, and past earnings growth was not calculable for this table)

As you can see, Hershey's P/E, P/FCF, and PEG ratios are all quite high, especially for a steady consumer goods company. We can rationalize it compared with each of Hershey's peers - Kraft and Nestle have large European exposure and less consistent growth, Sara Lee is highly valued and about to go through a split, Smucker's and Kellogg's don't have as much growth in front of them - but that still leaves the price high, only 2% off its 52-week high of 10 days ago.

That said, if commodity costs continue to stabilize, Hershey's history of execution burnishes its position and reduces the risk of a major reduction in the stock. The company has beat the S&P 500 (SPY) handily over the past year, and offers a nice counter-cyclical should Europe or the world economy go to hell in a chocolate basket.

(Source: TDAmeritrade)

(Note: dark green line is Hershey's, black line is S&P 500, light green line is Hershey's 9 day SMA, blue line is its 27 day SMA, and turquoise is its 200 day SMA)

I have been uncomfortable in my short investing career with buying a stock near its 52-week high, but this environment and Hershey's stock offers a compelling reason to do so. I turn to Jim Cramer's advice for buying off the 52-week high list, which is to wait for a 5%-8% pull back before getting in. An 8% pull back from the 52-week high for Hershey's would bring the shares to about $64, with a yield of 2.375%. Assuming the overall macro environment hasn't changed drastically for the better, Hershey's makes sense starting at $64 and even dropping a bit further if it goes below its pre-earnings levels of $62.5.

Hershey's offers growth, dividends, security, and safety from Europe. As we enter a summer that might resemble last year's hairpin turns on the market, those items are attractive. And if Hershey's wants to initiate a special candy dividend, I will be glad to take no credit for the idea, as long as the Reese's finds me well.

Source: Investing In Hershey's, Or The Wrong Way To Eat A Reese's