Why Investing in Hershey Is a Sweet Idea

Candy maker Hershey (NYSE: HSY  ) has been in the news for the right reasons of late. The company has experienced growth across the globe, posted solid fourth-quarter results, and entered into a partnership with 3-D printing company 3D Systems (NYSE: DDD  ) to make 3-D-printed chocolate candy. So, Hershey is looking to bring innovation to the table in chocolate-making that should aid its growth in the long run.

Chinese expansion
Going forward, Hershey is broadening its product line through both innovation and acquisitions. It will be acquiring Chinese candy maker Shanghai Golden Monkey Food for $584 million to improve its position in the Chinese market. Shanghai Golden Monkey has production facilities in five cities in China, and its products are sold nationwide. Moreover, according to Hershey, Shanghai Golden Monkey's revenue is growing in the double digits on an annual basis.

This is a smart move by Hershey since the Chinese chocolate confectionery market is a big one at $12 billion; Mars and Nestle (NASDAQOTH: NSRGY  )  are the leading players there. So, Hershey's latest acquisition should help it tap this market in a bigger way.

Mars leads the market in China with a 40% share, with Nestle coming in second. However, Nestle is quickly expanding its presence in the Chinese market. It opened a couple of factories in China last year, focusing on coffee production and dairy. Nestle has close to 40 factories in China, which enables the company to satisfy growing demand for chocolate consumption in the country. The company has seen market-beating sales growth in the region, so Hershey must make strong moves in China to make a reasonable impact on the market.

Looking elsewhere abroad, Hershey expects good sales from the Canadian market, where it is the leader in candy and mints. In China and Mexico, last year's positive sales trend is expected to continue once again. 

Focus on products and innovation
Hershey is also broadening its product line by launching new products such as Hershey's Spreads in the 13-ounce jar, Graham Crackers Sticks, Lancaster Soft Cremes Caramels, York Minis, and more.

In the candy, mint, and gum category, Hershey is gaining traction. This category has outperformed the sales of other snack alternatives including salty snacks, snack nuts, cookies, and crackers. Moreover, the company performed well in the U.S. market and recorded share gains in almost every channel. Hershey's core brands, such as Reese's, Kit Kat, Rolo, and Brookside drove market share gains. Looking ahead, Hershey expects the gum and mint segments to perform well this year after similarly recording market share gains in the previous quarter. 

Also, Hershey isn't afraid of innovation. As mentioned earlier, it is partnering with 3D Systems to develop "innovative opportunities" in 3-D-printed food. .3DSystems' expertise in 3-D printing with products such as ChefJet will give Hershey a new dimension in chocolate confectionery. 3D Systems showcased a few 3-D-printed candies at the Consumer Electronics Show earlier this year, made by its ChefJet, and the sweets had a good taste, according to The Verge. So, this collaboration could turn out to be profitable for both parties in the long run. 

Bottom line
Hershey is making all the right moves. The company is taking big steps into the lucrative Chinese market, expanding its product lineup, and creating new products with 3-D printing. It also expects growth in other international markets such as Brazil and Mexico. Moreover, Hershey pays a good dividend with a yield of 1.9%. Along with a decent projected annual earnings growth rate of almost 11% for the next five years, Hershey looks like a solid investment.

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Comments from our Foolish Readers

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  • Report this Comment On April 10, 2014, at 8:13 PM, brandonchen wrote:

    Why is this a big deal? Hershey is small on the whole scheme of things for DDD...

  • Report this Comment On April 11, 2014, at 10:34 AM, BradReeseCom wrote:

    Hi Neeta,

    You state:

    "Hershey's core brands, such as Reese's, Kit Kat, Rolo, and Brookside drove market share gains."

    So what's missing from your market share gains quote above?

    Why the Hershey's brand!

    Reese's and Kit Kat are both manufactured by the "nonunion" H.B. Reese Candy Company.

    Bloomberg recently published the World's Top 5 candy brands:

    Only $76 million of the #2 ranked worldwide candy brand Reese's $2.7 BILLION in sales were made outside of the United States.

    HSY shareholders have lost untold billions in new HSY shareholder wealth because HSY refuses to market and/or promote its most financially successful candy brand, Reese's, worldwide.

    Try and find the Reese's brand on Hershey's International websites (other than Canada and Mexico):

    However most disturbing in my opinion, is that the United States Hershey website is TOTALLY MISSING from Hershey's International websites!

    I mean, how "hayseed provincial" of a mindset does that reveal about HSY's executive management?


    Brad Reese

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