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Why Hershey Looks Like a Sweet Investment

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Chocolate is big business, and with the holiday season round the corner, now is the peak time for chocolate makers to make some good money. According to a survey of  the National Confectioners Association, nearly 72% of all candy spending this Halloween was on chocolate and the same trend can be expected to continue in the holiday period.

The U.S. constitutes more than 86% of the North American chocolate market . Since The Hershey Company (NYSE: HSY  ) holds the largest chunk at 43.30% of the U.S. market, it is a good time to see how it is positioned going into the holidays. It competes with peers such as Mars/Wrigley, Nestle SA (NASDAQOTH: NSRGY  ) and Mondelez International (NASDAQ: MDLZ  ) in the CMG (chocolate, mint and gum) category.

Hershey's growth prospects and Nestle's moves
Chocolate sells well even in tough economic conditions. For example, last year, more than $12.6 billion was spent on chocolate in the U.S, 3.8% more than the year before . This trend is reflected in the third-quarter results of Hershey's as well.

Hershey posted estimates-beating earnings of $1.04 per share, 2.9% higher than what analysts had estimated. This was a considerable 19.5% improvement versus the same period a year ago. Third quarter's revenue of $1.85 billion was 6.1% higher versus the same quarter a year-ago, driven by higher volumes.

Compared to Hershey, Nestle reported 4% growth . Despite a slowdown in the economies of Latin America, Nestle's Kit-Kat grew in double digits. The company is confident of delivering 5% organic growth for the full year.

It is expected that the global chocolate market will grow from $83.2 billion in 2010 to $98.3 billion in 2016 at an estimated CAGR of 2.7% . Asia will have a higher CAGR of 4.7%. Among the Asian nations, China is important, and so is India due to the increasing purchasing power of the ever-growing middle class. China's middle class is expected to grow to 340 million by 2016  and this represents huge potential going forward.

According to Natra, China has an annual chocolate consumption of 100 grams  per person, compared to 8 kilos per person in Western Europe, but it is the sheer size of population that makes it an interesting and lucrative market. There's ample headroom for growth in consumption per person also.

Hershey launched the Lancaster brand of caramel candies in China in May and will be launching this in the U.S. in January 2014. This shows the importance that Hershey is attaching to the international market and China in particular. It has also announced that it will be building a $250 million plant in Malaysia, which is its largest investment in Asia ever .

This plant will provide easy distribution access to more than 25 markets across Asia. As already stated, the chocolate market in Asia is expected to grow at a brisk pace and is expected to account for 20% of the global market going forward. Hence, Hershey is looking to fortify its position here to benefit from the expected growth.

Going forward, Hershey aims to attain sales of $10 billion by 2017 , with 25% of revenue coming from the international markets. For this, it is willing to make acquisitions, apart from innovating new items to enhance its portfolio.

But Hershey's will have competition from Nestle, which has over 27 factories in the Greater China region and is known for the strong demand for its products in the country. Nestle holds the highest market share in infant formula in China, as in most of the emerging markets. Recently, it acquired a 60% stake in China's biggest confectioner , Hsu Fu Chi. In July, Nestle announced the opening of two more factories in China.

Mondelez joins the fray
Competition is expected to get stiffer with Mondelez, the maker of Cadbury and Oreo Cookies, also looking ambitiously at the Chinese market. In June, Mondelez invested approximately $85 million  in the expansion of its plant in China. The company expects to increase investments by about $100 million this year, $200 million in 2014 and up to $300 million in 2015 and thereafter in emerging markets.

Also, Mondelez recently reaffirmed its expectation of delivering organic net revenue growth at the low end of its 5%-7% long-term target this year. As Mondelez continues to push in high-growth markets, it might be able to deliver higher growth rates.

Bottom line
Hershey is the leading player in the North American chocolate market and the company is also looking to make a move in China. It might face competition from the likes of Nestle and Mondelez, but for investors looking for exposure to the chocolate market, Hershey's would be a good option.

Its strong brand, recent investments to tap growth in the Asian market, and a good dividend yield of 2% are some of the reasons why you should consider Hershey's for your portfolio.

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Comments from our Foolish Readers

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  • Report this Comment On November 24, 2013, at 7:06 PM, BradReeseCom wrote:

    Hi Vinay,

    The joke among Wall Street investment bankers is that The Hershey Company is nothing more than the H.B. Reese Candy Company "doing business as" (DBA) The Hershey Company.

    For example in 2012 (according to Advertising Age and Euromonitor International), the Reese's Brand was the #1 ranked candy brand in the United States with U.S. sales of $2.603 billion. Additionally, the Reese's Brand was the #4 ranked candy brand globally with sales of $2.679 billion. That's right, Reese's was ranked #4 globally with only a mere $76 million of its sales outside the United States. Heck, the Hershey's Brand did not even make the candy brand rankings either globally or even in the United States:

    Furthermore, the non-union H.B. Reese Candy Company manufactures the Kit Kat in the U.S., which was the #4 ranked candy brand in the United States with 2012 sales of $948 million.

    On Facebook, the Reese's Brand:

    Has "4 times" the number of United States fans than the Hershey's Brand:

    In other words, without the H.B. Reese Candy Company, the stock market value of The Hershey Company would only be several billion, not the $21 billion it is today:

    Finally on July 2, 1963, 7-years after my grandfather H.B. Reese's death in May 1956, my father Charles Richard Reese and his 5-brothers (Bob, John, Ed, Ralph and H.B. Reese, Jr.) merged the H.B. Reese Candy Company with the Hershey Chocolate Corporation in a tax free stock-for-stock merger:

    With the 6 Reese Brothers receiving 666,316 shares of Hershey common stock valued in 1963 at $23.5 million. After the 1963 merger, the Reese Brothers owned such a large portion of Hershey's Public Float, they were restricted by an investment letter from selling any Hershey shares. Over the past 50-years Hershey's stock has split so many times, the original 666,316 Hershey shares owned by the 6 Reese Brothers now represent 16 million Hershey shares:

    Hershey stock has performed over the last 5-years because Leroy Zimmerman fired the Board Directors of The Hershey Company. The Reconstituted Hershey Trust Board included Roy Zimmerman who became the new Chairman of the Hershey Trust Company (the controlling shareholder of The Hershey Company). As leader of the controlling shareholder, Zimmerman held Hershey's Board of Directors and Executive Management Team accountable for The Hershey Company's poor operational and financial performance. Fed up with Hershey's incompetent Board Directors and Executive Management Team, on October 25, 2007, Zimmerman sent the following confidential letter to The Hershey Company Board of Directors:

    Hershey hareholders need to be aware of the following shocking key points made by Zimmerman in his above confidential letter to the Hershey Board of Directors:

    1. There has been in the past two years a 3.2 market share point shift vs. M&M/Mars (a combination of a loss of 1.3 share points by the Company and a gain of 1.9 share points by Mars).

    2. The Company's net sales (excluding acquisitions) are at their current levels principally through price increases and weight reductions. Mr. West indicated at the October 2nd joint meeting that the limit has been reached for further price increases, and, in fact, price reductions may be necessary.

    3. The shift in focus from major core brands items to new products (including "limited editions/in-and-out" items) has resulted in poundage or volume reduction in core brands, -20% in some cases. Getting major core brand volume back is a major challenge, in particular, given a re-invigorated Mars.

    4. The Company dramatically cut advertising and other direct brand expenditures (in the tens of millions of dollars) in the 2003-2005 period, thus underinvesting in core brands, but allowing for the bottom line to grow. As one analyst noted, the Company could be perceived as "over-earning" during this period ("over-earning" not used in an accounting but performance sense).

    5.The Company has taken four restructurings since 2001, resulting in aggregate charges in excess of $1 billion and the loss of approximately 3,000 jobs (including the Supply Chain Transformation, but excluding jobs that will be created in Mexico). Many of the job losses are related to the reduction in overall poundage as opposed to pure efficiency improvements. This reduction, by Company management's own admission, is in turn related to the unsustainability of the "limited editions, in-and-out" marketing strategy. With a sustainable marketing strategy, job losses at this level may have been avoided.

    6.Company management has acknowledged product quality and taste issues, indicating "the plant managers let the guard-rails of quality get too far apart."

    7. The Company has missed its earnings targets for the six quarters ending 2007 and given numerous earnings warnings during this period, including most recently last week.

    8. All of this has occurred on the current Board's "watch," and the Trust is deeply concerned the Board regards this as a "long track record of strong performance."

    Not long after penning his letter, Hershey Trust Chairman Roy Zimmerman, the leader of Hershey's controlling shareholder, kicked to the curb the following incompetent (at least in my opinion) Hershey Board Directors:

    In conclusion, Hershey shareholders needed to know that the leader of Hershey's controlling stockholder, Roy Zimmerman, kicked butt and took names when it was necessary, with the end result being huge wealth creation for Hershey's shareholders.

    As the current Chairman of the Board of The Hershey Company, Hershey Trustee Jim Nevels deserves extra special praise and recognition for carefully watching over the operational and financial performance of The Hershey Company. So here are the 2-heroes that investors need to personally thank for increasing the value of The Hershey Company:


    Brad Reese

  • Report this Comment On November 25, 2013, at 2:30 AM, RobertBrad wrote:

    Hershey is focusing on its targets and may improve in couple of months.

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