Drip Portfolio Report
Tuesday, December 9, 1997
by Randy Befumo (TMFTemplr@aol.com)

ALEXANDRIA, VA (Dec. 9, 1997) -- Today we change up and take a look at candy by examining Hershey Foods (NYSE: HSY).

Description: Hershey's bread and butter are chocolate, confections, and all manner of sweet treats. Founded in the late 19th century, the company vies with Mars and Nestle for dominance of the world candy market. Although the company is the largest provider of dried pasta products in North America and also runs a theme park in Hershey, Pennsylvania, the company lives and dies on products that are the bane of dentists everywhere. Interestingly, the company only started to advertise in 1970, as founder Milton Hershey believed that quality spoke for itself.

Major brands include: Hershey's Kisses, Hershey's Cookies & Creme bars, Hershey's Hugs, Amazin' Fruit gummy bears, Cadbury's Creme Eggs, Caramello candy bars, Kit Kat candy bars, Luden's throat lozenges, Mr. Goodbar candy bars, Almond Joy and Mounds candy bars, Reese's Peanut Butter Cups, Reese's Pieces, Rolo caramels, Skor toffee, Symphony chocolate bars, Twizzlers, York peppermint patties, 5th Avenue candy bars, Jolly Rancher, Milk Duds, Whoppers, Payday, Sweet Sensations, TasteTations, and Pot of Gold, to name all of the candy. The company also uses the Hershey's brand to sell baking chips, drink boxes, cocoa, chocolate milk, syrup, and peanut butter. Pasta brands include American Beauty, Mrs. Weiss, Ronzoni, San Giorgio, Skinner and Weiss.

Core Moneymaker: Chocolate, baby, chocolate.

Financials: Because this is an overview, we'll only look at a few key things: how is the company priced relative to sales, earnings per share, and the expected growth rate (valuation); what are the current operating and net margins (margins); how much long-term debt does the company have (leverage); and what does management do with the cash that it generates (capital allocation)?

Valuation, Growth, and Share Performance: At $60 5/8 per share, Hershey's market cap is $8.7 billion (share price multiplied by 142.9 million shares outstanding). With trailing sales of $4.3 billion, the company trades at 2.07 times sales (which is the market cap divided by the trailing sales).

Hershey has $71.0 million in cash and $1.4 billion in long-term debt. The enterprise value of Hershey (enterprise value was described in last Thursday's report) is closer to $10.0 billion, and that value in relation to sales is 2.33. This is moderately higher than the average food company we have seen over the past few weeks, although we have not totaled them all up yet.

On the earnings per share side, Hershey trades at 27.6 times trailing earnings per share. While expected to grow earnings per share 12% annually for the next five years, the stock trades at 26.9 times earnings estimates for this year and 23.7 times fiscal 1998 estimates.

Margins Reviewed: Again, operating earnings divided by revenue gives us the operating margins. This number shows what the company is earning after the cost of the product and all the costs of running the business are subtracted. It indicates how efficient management is at running the business "operations" -- hence, operating margins.

For the last twelve months, Hershey had $4.3 billion in sales and $581.1 million in operating income, giving operating margins of 13.5%. This is slightly better than average and reflects Hershey's dominance in the candy market.

Leverage reviewed: With $1.4 billion in long-term debt and $4.3 billion in sales, Hershey has a 32.5% debt-to-sales ratio. This is a little on the high side and would be a reason to double-check the company's annual interest payments to see if it can cover them adequately in even the most conservative of scenarios.

Capital allocation: Like every other food company on the planet, Hershey pays a dividend. This dividend is 1.4%, which is below the average for S&P 500 companies. What is impressive is that the company has repurchased half a billion dollars in stock over the past nine months alone, after being a skimpy stock repurchaser for the few years previous. We definitely like this change and this may, in fact, balance out the higher-than-average debt that the company carries.

The Snapshot for Hershey:

Ticker: HSY
Recent Price: $60 5/8

Trailing 12-month sales: $4.3 billion
Trailing 12-month oper. earnings: $581.1 million
Operating Margins: 13.5%
Trailing 12-month EPS: $2.20

Fiscal '97 EPS estimates: $2.25 (only one quarter away)
Fiscal '98 EPS estimates: $2.56

Enterprise value to sales: 2.33
Current P/E: 27.6
P/E on 1998 EPS: 26.9
P/E on 1999 EPS: 23.7
Long-term expected growth rate: 12%
Yield: 1.40%

Conclusion: Jeff added a conclusion section to the write-up when he started doing them, which kinda puts me in a bind since I was planning on concluding after I had finished all of mine. I like to look at the universe of all companies before I start dismissing any investment possibilities, and we have quite a few more to work through. I can say that nothing looks so alarming that I would have to dismiss it.

Have You Given? The Fool Charity Fund


Stock   Close    Change
INTC  $75 5/8  -2 13/16
JNJ   $65        - 3/16
              Day      Month     Year       History
Drip        (1.65%)   (0.92%)   (11.46%)    (11.46%)
S&P 500     (0.67%)    2.13%     31.73%       2.57% 
Nasdaq      (1.88%)    1.25%     25.52%       1.68% 

Last Rec'd    Total #    Security    In At    Current
 11/03/97      4.835       INTC     $81.623   $75.625
 11/14/97      1.000       JNJ      $62.125   $65.000

Last Rec'd    Total #    Security    In At     Value   Change
11/03/97      4.835       INTC     $394.69   $365.68 ($29.01)
11/14/97      1.000       JNJ       $62.13    $65.00   $2.88 

Base:   $900.00
Cash:   $389.75**
Total:  $820.43

GOAL: The portfolio began with $500 on July 28, 1997, 
adds $100 on the 15th of every month, and the goal 
is to grow the port to $150,000 by August of the year 2017. 

**Transactions in progress:
11/24/97: $100 sent to purchase more Intel.

The Drip Portfolio has been divided into 
37.063 shares with an average purchase
price of $24.283 per share.