Hershey, Pennsylvania, which calls itself the sweetest place on earth, probably doesn’t seem so sweet to the more than 500 workers fired from the town’s namesake Hershey Co. (NYSE:HSY) this year. The downsizing, part of a restructuring at the 116-year-old chocolate maker, illustrates competitive pressures felt by Hershey as its rivals Kraft Foods (KFT) and closely held Mars have gotten bigger through takeovers.
To stay in the game, Hershey mulled trying to acquire larger rival Cadbury earlier this year. It lost out to Kraft, which paid almost $20 billion for the British company, a price more than twice Hershey’s stock market value at the time. Investors thought Hershey would have been biting off more than it could chew, and when Hershey lost out on Cadbury they bid up Hershey shares in relief.
Maybe Hershey dodged a bullet. Cadbury sales have been sluggish since Kraft bought the chocolate maker, a move that was opposed by Warren Buffett, one of Kraft’s biggest holders. And even with the rise in price, Hershey’s shares appear under-valued, according to YCharts Pro rating system.
Consumers are spending less on discretionary items like chocolate bars. And Hershey competes with giants Nestle (OTCPK:NSRGY), Kraft and Mars, which snapped up gum maker Wrigley in 2008, for those scarce dollars. But the power of its brands — Reese’s, Kit Kat, Twizzlers and, of course, the candy bars, syrup and Kisses that bear the company’s name – has allowed Hershey to raise prices (twice in 2008).
The company makes most of its products in two plants in Pennsylvania, a site in Virginia and another in Mexico, and is now attacking its cost structure. It’s spending more than $200 million to update a factory in the company town built by Milton Hershey, while laying off hundreds of people who worked on Chocolate Avenue. The moves are aimed at making the company more profitable going forward.
The last restructuring was 2007. Since that time, profit margins mostly rose but they took a dip earlier this year as the company spent to reposition itself.
Getting products in front of the customer — especially at Halloween and Christmas — is key. So far, bigger rivals haven’t elbowed it off of store shelves. Almost 30% of Hershey’s 2009 sales were funneled through one distributor, Berkshire Hathaway’s (NYSE:BRK.A) McLane Co., a major supplier to Wal-Mart Stores (NYSE:WMT), convenience stores and other retailers. Sales through McLane were $1.4 billion last year vs. $1.3 billion in 2008 and 2007.
Steady profit funds a decent dividend.
And Hershey’s earnings power and popular brands make it a takeover candidate. So far, the trust that controls the company’s majority voting shares has rejected that path. For now, the candy maker is doing what it needs to keep up with the bigger competitors, making it an attractive stock.