Stock of the Day - March 22, 2009 - HSY

Hershey Co. (HSY)

Hershey (HSY) produces and distributes a variety of chocolate and confectionary products, including Hershey’s Kisses and Reese’s.  The company is the largest American chocolate producer, with around 45% of the domestic market share.  It is no longer the largest candy producer though, as Mars Inc. recently surpassed Hershey with its $23 billion acquisition of Wrigley. 

Hershey’s stock price only fell 12% in 2008, and it is currently trading at $34.93.  Its share price has actually only dropped 9.04% since exactly one year ago.  Comparing that to the S&P 500, which has lost 43.07% of its value from the same time one year ago, it is clear to see that Hershey has been doing some things right. 

One of the reasons that Hershey’s stock price has not been hurt too badly in this recession is because chocolate is a largely recession-resistant good.  The company actually increased its sales in 2008 by 4% compared to 2007, and chocolate sales continue to do well, as chocolate is considered to be a very affordable luxury.  Eating chocolate is a cheap way to make yourself feel good, and people have turned to it throughout this recession in order to give themselves a treat. 

While I do think that Hershey’s stock price is currently overvalued, I believe that the chocolate company is setting itself up very well for long-term sales growth and profit growth through many different strategic avenues.

The first way in which Hershey is increasing sales growth is by expanding into international markets, something relatively new to the company, as it has historically operated mainly in America.  The company is currently focusing on expanding its operations into Mexico, Brazil, Canada, and Asia.  With its recent purchase of “Van Houton”, a consumer chocolate business in Asia, the candy maker has started its aggressive attempt to increase its presence abroad.  Hershey is also planning on increasing sales through more advertising.  The company has announced that it will take advantage of lower advertising costs by increasing its ad spending by 20% this year. 

In addition to increasing sales growth, Hershey is focusing heavily on increasing its profit growth.  Understanding that its products are more inelastic and recession-resistant than most other products, Hershey has been raising the prices for its most popular products.  This has worked very well for the company, and it has not hurt sales.  Hershey’s raw costs (Cocoa, plastic, oil, etc.) for producing its chocolate and other candy products have also dropped as a result of the recession.  When combining higher selling costs with lower production costs, it is clear to see that the company’s profit margins are increasing.  This means that for everything that Hershey sells, it is making more profit than it used to.  The company’s increase in profit margin, combined with its increase in sales will lead to solid income growth for the company.   

While the fundamentals look great, I have some issues with the company’s stock price.  First of all, Hershey’s shares have increased by 13.6% since March 10^th, far too drastic of a move for a company that usually has a very stable and slow-moving stock price.  This sudden increase has to do with the recent overall market rally, but it also has a lot to do with the fact that Jim Cramer has been promoting the stock heavily on his show.  The company also has a P/E ratio of 25.65 and a PEG ratio of 3.42.  These numbers are ridiculously high when comparing them to other food processing companies, as the average P/E ratio for the industry is 12.12 and the average PEG ratio is 1.47.  Hershey’s valuation numbers are so high, especially compared to its industry, that its stock price seems to be unbelievably overvalued.  People are starting to notice that Hershey’s stock is too pricey, and 7.4 million shares (4.84% of total shares outstanding) are currently being shorted as a result, compared to only 6.1 million shares last month.  Right now might actually be a great time to short Hershey’s stock, before more people catch on to the fact that it is grossly overvalued and pull the stock price down. 

Hershey’s share price would have to drastically decrease for me to even consider buying it.  But even then, I would hesitate for one simple reason.  With a Beta of .25 (Beta was the term of the day on February 6^th), Hershey’s stock price is usually very stable and moves much slower than the overall market.  If the market has bottomed already, or if it is close to bottoming with the expectations of a huge rally coming up, I would not want to be invested in a company with a Beta of .25.  Instead, I want to be invested in companies with Betas of over 1 that I can really profit off of when the markets do start to rally. 

Although Hershey is doing some things right and is slowly growing both sales and profits, I still think that it is overvalued.  If you are looking for another company in the food processing industry, maybe you should check out Heinz (HNZ).  Heinz is giving out a 5.1% dividend yield and is trading with a P/E ratio of 11.17, making it a much better value than Hershey.

Niki Pezeshki

College Trillionaire