Hershey -- A Treat*

By Paul Larson (TMF Parlay)

Trading at $50 3/16 as of October 25, 1999

Instead of giving you a trick and dropping some rotten eggs in your bag like I have in years past, this year I'll imitate what I do in the real world and drop a chocolate bar in your bag. Here's a Hershey (NYSE: HSY) for you!

This Halloween, I find it ironic that one of the companies I like the most happens to be one that has an entire holiday dedicated to accumulating its products. I wasn't being cute when choosing to write about Hershey. Rather, I honestly believe that Hershey represents a compelling investment opportunity today. Let me count the ways in which I find Hershey's stock as tempting as its chocolates:

-- Awesome products and brand names. From Almond Joy to York Peppermint Patties and all the delicious yummies in between, the company's products are well-known and loved by consumers across the country. Anyone for a Reese's Peanut Butter Cup?

-- I can easily understand what Hershey produces and how it makes money. Never underestimate the importance of staying within one's circle of competency when investing.

-- The company's products are sold in literally millions of locations. From the local supermarket to the corner gas station to the vending machine down the hall, the Hershey distribution system is as wide and as strong as they get. Plus, candies are a repeat purchase business, which is something we Fools tend to like.

-- Focus on candy. The company recently sold its pasta business (for a tidy profit) in order to concentrate on doing what it does best: making confectionaries. The company does one thing, and it does it extremely well.

-- Attractive value-added attributes. Over the past five years the company has been able to produce a return on its invested capital in the 15-17% range. Between Hershey not needing to invest heavily in the business to keep it running and the company's low cost of capital (Hershey's outstanding debt yields in the single digits), the company has been able to, and will continue to, create value for shareholders.

-- Rock-steady financials. In every single year since 1987, the company's net margins have been in the 5-8% range. Sales have also doubled over the past 10 years, and modest growth should continue. Moreover, Hershey's bottom line has been the same color of its dark chocolate for decades. This should not change.

-- A sweet dividend. The stock yields right around 2%, which is far above the average stock these days. Hershey has an extremely long history of increasing its dividend, and I fully expect the dividend to continue to grow. It's worth noting that the company recently paid its 279th consecutive quarterly dividend. Think about that one for a moment!

-- A wide moat around its business. The confectionary market is largely a mature one, and Hershey does not have to worry about upstart competitors or new technologies making its products obsolete. Count its scale and wide distribution as major sustainable competitive advantages.

-- An extremely defensive stock. Food is the quintessential defensive industry, and the confectionary makers may be the best in their class. No matter where the economy goes, people still have to eat. Plus, margins on candy products tend to be higher than other grocery products. And I don't know about you, dear Fool, but the chocolate is the first thing to disappear from my kitchen after a trip to the grocery store.

-- Hershey is a cash cow. The company is generating excess cash that it is using to pare down its nominal debt and repurchase shares. With fewer shares outstanding and stable profits, Hershey should be able to rapidly accelerate its earnings per share as well as its dividend payout.

-- An attractive valuation. The company is trading at slightly less than 20 times forward profit expectations, which seems fairly low for such a high-quality company. Plus, I've done a number of intrinsic value estimations, and nearly every time I crunch the numbers, I show a fair value somewhere in the $60 range. Today, I can buy and hold a great company at a modest discount, which is really what Foolish investing is all about.

-- Hershey has at its very core a noble cause. With Hershey, an investor is profiting alongside one of the largest philanthropic organizations in the country -- the Hershey Trust Company. Among its numerous recipients, this organization funds a large orphanage and school in the company's namesake town of Hershey, Pennsylvania. I can think of few companies that have done more to benefit society as a whole.

Yes, I've already bought my Reese's and Hershey Kisses to give out this Halloween, and I'll also be buying Hershey's stock in the near future, too. I'm confident it'll be a treat to own.

Next Treat -- MyPoints.com

Hershey Company Information:
Trades on NYSE under symbol HSY

  • Hershey's website: www.hersheys.com
  • Current Quote
  • Hershey's Chart
    Other Related Links:
  • Hershey's Message Board
  • Hershey Dueling Fools -- 8/25/99

    * A Trick or Treat represents the opinion of one Ghoul and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Ghoul's thoughts.

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