FOOL PLATE SPECIAL
An Investment Opinion
Hershey Doesn't Skor Warren Gump (TMF Gump)
September 13, 1999
Hershey Foods Corp. (NYSE: HSY) warned investors that its per-share earnings for the year wouldn't be very sweet, falling to $2.16-$2.20 per share, 8%-10% below prior company guidance of $2.40 and less than the $2.34 earned last year. Company management blamed the shortfall -- most of which it expects to fall in the current third quarter -- on the implementation of new business systems in areas like customer service, order fulfillment, and warehousing.
After initially opening down a couple of points at $50 per share, the stock has actually moved up a little bit in morning trading. While this movement may seem perplexing, analysis of this stock's performance over the past month and a half might provide an explanation. Since the end of July, when Q2 earnings were released, the stock has fallen steadily from $58 to the low-$50 range. Such substantial downward movement looks like investors didn't expect the company to achieve its earnings targets. With today's announcement, investors no longer need to speculate about the magnitude of the problems -- and for some, they may not be as dire as anticipated.
As always, investors need to remember that quarterly results are just noise for investors with a long-term time horizon. Much more important than what happens over three months is what happens over several years. Between 1991 and 1999 (assuming the high end of the projection released by the company), EPS would have grown 8% annually. While that level of growth is admirable, it isn't really overwhelming in light of the fact that this period encompasses one of the most prosperous periods in domestic economic history.
Analysts currently estimate that earnings for the company will grow about 10% per year over the next few years. Does Hershey have a catalyst that will make the next five years better than the last nine years? Many food companies can point to international markets as having an adverse impact on results over the past couple of years. As economies throughout the world blew up, profits for many companies also shrunk. Assuming some stabilization in these markets, the companies are poised for more rapid earnings growth. Unfortunately, Hershey doesn't have this excuse since its sales outside the U.S. are "not significant" and it doesn't seem to be trying to aggressively move into these markets.
Hershey has dominant domestic brands and, relative to the market, its stock has a low valuation. While these characteristics can be attractive from an investing point, a third characteristic -- growth opportunities -- are not obvious. The company's domestic market seems fairly mature with nominal growth and it hasn't been successful in international and expansion endeavors. Unless something changes and the company finds ventures to boost its growth rate, you can probably find better places to put your money.