You don't need to find the next huge technology stock to generate life-changing returns. Instead, you only need a durable business model that can steadily grow its profits for decades. This stock has turned an initial $10,000 investment into $6.1 million over 50 years, a 610-bagger.
The secret? Sell chocolate to Americans over and over again. I'm talking about The Hershey Company (HSY 0.18%). Investors often overlook boring businesses, but boring can be beautiful -- and lucrative.
Here is how Hershey does it and whether it still has the magic for long-term investors looking decades ahead.
How Hershey profits over and over again
NYSE: HSY
Key Data Points
Hershey is behind many of the most popular chocolate, candy, and snack brands in the United States. Some of the household names include:
- Chocolate: Hershey, Reese's, York, Kit-Kat, Milk Duds, Rolo
- Candy: Twizzlers, Bubble Yum, Ice Breakers
- Snacks: Paqui, Skinny Pop, Pirate's Booty
The company's chocolate products own roughly a third of the market in the United States, making it the industry leader. Collectively, Hershey is doing $10 billion in annual sales.
Chocolate and candy are a part of American culture. You eat it during holidays, when you go to the movies, or in the check-out line at the store, and consumers enjoy Hershey's brands repeatedly.
HSY Revenue (TTM) data by YCharts.
But steady growth isn't the whole story. Hershey is very profitable, turning $0.17 of every revenue dollar into free cash flow. Then, Hershey effectively puts those profits to work, generating a 21% return on invested capital. It's a rinse-and-repeat cycle that results in steady earnings growth through good and bad times.
Two ample growth opportunities moving forward
Hershey has spent most of its history selling chocolate to Americans, but there is a lot of room to go beyond that in the years ahead. Hershey doesn't have a large international footprint; non-U.S. sales were $853 million in 2022, just 8% of total revenue. Different competitors and consumer tastes make each market somewhat unique, but Hershey has progressed. The company's international sales were $626 million in 2020, meaning sales grew 36% over the past two years.
Product innovation and expansion are Hershey's other major growth outlets. It spent $420 million to buy Pirate Brands in 2018 and another $1.2 billion to buy Dot's brand in 2021. These snack food acquisitions gave Hershey's a completely new product category and an opportunity to cross-innovate with its existing brands. For example, Hershey now sells sweet and salty snacks like popcorn with chocolate drizzle.
Overall, management believes it can grow earnings per share (EPS) by an average of 6% and 8% annually over the long term, which seems achievable given the various growth levers it can pull (including gradual price increases).
Should you buy shares today?
The market is aware of how great a business Hershey is, which is why the stock seldom trades at a cheap valuation. You can see below that the last time the stock's price-to-earnings ratio (P/E) touched 15 was nearly a quarter-century ago:
HSY PE Ratio data by YCharts.
You could argue that Hershey is expensive today against its historical average of 25 times earnings, especially if management's long-term growth target is high single-digit EPS growth. The stock's premium means that investors should probably wait to buy shares. Great companies can be remarkably consistent, but overpaying will cancel out much of the company's growth.
It seems that every so often, a broader market correction can knock shares back down to earth, so put Hershey on the list of stocks to pounce on the next time that happens. Investors who score shares at a P/E in the low 20s can buy and hold on tight. Until then, stand back and admire one of America's most overlooked yet remarkable businesses.
