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Is Hershey Company a Buy?

By Justin Cardwell - Mar 15, 2020 at 4:44PM

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A leader in the confectionary industry can provide shelter in times of economic uncertainty.

Hershey (HSY -1.71%) stock is down just 5% year to date, outperforming the 16% decline of the S&P 500 following the market sell-off fueled by the coronavirus outbreak. As global economic health becomes less certain, defensive consumer companies such as Hershey have historically offered investors shelter from volatility.

Let's see if shares of Hershey are an attractive harbor from the current storm given the health and future potential of the company.

Girl about to eat a chocolate bar

Image source: Getty Images.

Strength in diversification

Over the past few years, Hershey has been acquiring snack brands to diversify its revenue and drive growth. In 2018, Hershey announced the largest deal in the company's history by acquiring Amplify Snack Brands for $1.6 billion. Amplify includes high-performing offerings like SkinnyPop popcorn, Oatmega cookies, and Paqui chips.

In Sept. 2019, Hershey also acquired ONE Brands, a maker of nutrition bars, for about $400 million. Both of these acquisitions put Hershey firmly in the snack business, which the President of U.S. operations stated in 2018 "will help achieve our bold vision to be an Innovative Snacking Powerhouse" -- diversifying the portfolio of products and driving growth in key areas.  

Hershey President and CEO Michele Buck stated during the fourth-quarter earnings call that "Hershey is a branded, high-gross margin company." These acquisitions have helped Hershey deliver a strong operating margin, improving from 17.5% in 2017 to 20.0% in 2019. Top line growth isn't anything to write home about at just 2.5% for last year. However, the international segment is proving to be quite promising and has the ability to help boost top- and bottom-line growth going forward. 

International expansion

International markets delivered 5.4% organic, currency-neutral growth in 2019, while the North America segment was up just 1.3%. However, Hershey's domestic business currently enjoys higher profit margins. 

The international segment is showing an increase in profitability, while the North American segment flatlined last year. International segment income grew from $73.8 million in 2018 to $95.7 million in 2019, good for 30% growth. 

Buck noted during the earnings call that the international segment provides "geographic diversification and incremental growth," stating that Hershey is driven to continue expanding abroad. 

Senior Vice President Steve Voskuil also stated during the call that growth in international markets will be "volume-driven," while growth in North America will be driven by price increases. Voskuil said adjusted gross margins are expected to expand 40 to 50 basis points in 2020, a slower pace than seen in 2019. 

Impressive dividend growth

Dividend growth has been impressive for Hershey after a 31-year streak -- payouts increased 8.5% in 2019. But net debt also increased from $2.1 billion in 2015 to $3.8 billion in 2019. However, the net debt-to-EBITDA ratio is 2.0, which leaves Hershey in a good financial position.

In addition, the payout ratio, a metric used to determine how well a company can fund its dividend payouts, came in at just 53% in 2019. This gives a good indication that Hershey's business is healthy enough to support its 2.3% yield, and that dividend can be expected to continue growing. 

A sweet future

Looking at full-year 2020, Hershey is guiding for 2% to 4% net sales growth and adjusted earnings per share (EPS) between $6.13 and $6.24, which would represent 6% to 8% growth over 2018. Shareholders can expect Hershey to continue gobbling up popular, high-margin brands in the future as the company further diversifies its product portfolio. 

Shares of Hershey are trading at 23 times forward earnings estimates. Though that may seem high relative to the company's earnings growth, the ongoing initiatives to chase profitable brands, coupled with strong international growth, should make shareholders optimistic.

Buck stated in January that the fallout from the coronavirus will be marginal as the majority of Hershey's operations are in North America. However, management offered no further guidance regarding performance in 2020, and the outbreak is growing worse in Hershey's home market too. Regardless of any short-term headwinds, Hershey has healthy financials, a strong track record, and solid dividend, making it a buy in this uncertain economic climate

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