On a GAAP basis, Hershey reported a 3% increase in net sales for the quarter, to $1.4 billion. Operating income shot up 56% to $319.8 million. Net income increased 61% to $183.7 million, or $0.77 per diluted share. Accounting for the exclusion of charges related to realignments, the pro forma increases in operating income and net income become 5% and 3%, respectively.
For the nine-month period, under generally accepted accounting principles (GAAP), net sales increased 3%, coming in at $3.6 billion. Operating income increased 25% to $712.5 million. Net income appreciated by almost 26% to $403.1 million, or $1.68 per diluted share. Again, with adjustments, the increases in operating income and net income become 7% and 5%, respectively.
CEO Richard H. Lenny said he wasn't pleased with the company's results. He was disheartened by the decline in market share and the problems in the chocolate segment. He wants to reinvigorate the company's chocolate business, and he believes that acquisitions can help. The release talks about the purchase of Dagoba Organic Chocolate, and mentions previous acquisitions such as Cacao Reserve and Scharffen Berger.
The company's stock had fallen more than 4% yesterday by the close, and as you can expect, it was even lower at times during the intraday session; the volume of stubs changing hands was an enormous 9.7 million. I can understand the barons of Wall Street getting all huffy. After all, expectations weren't met, and the forward guidance wasn't so hot. Hershey expects 2006 earnings growth to fall below its plan, possibly even missing its desired 9%-11% range. (Earnings growth in 2007 is anticipated to be within that same range.)
But should you disregard Hershey as a potential investment vehicle, or dump the shares you already own? I don't think so. The confection industry is a solid, long-term idea, and Hershey is a major player among the likes of Cadbury Schweppes
Don't disregard such an iconic company on the basis of a bumpy quarter or two. Look at the entire context -- people will always reach for chocolate, and although I cannot divine the future, I'd be willing to bet that Hershey will always retain a strong connection with consumers both young and old, and that it will be satisfying sugar fixes for decades to come.
Let's not forget about dividends, either. According to Hershey's investor site, the annual dividend in fiscal year 1997 was $0.42 per share. Today, it's more than a buck. Dividend growth like that makes me smile.
I think Hershey is a competent company that will be a steady grower over time. It's no high-octane growth story, but that's OK -- it's a portfolio anchor. I'm not as bearish as Wall Street is on this earnings report; instead, I see a stable consumer business based on one of the most addictive substances on earth. The stock is currently sporting a yield of about 2%, and the stock price has pulled back from when it was trading in the mid-$50s just a few months ago. If the stock has a further pullback, it could definitely earn a place on your watch list.
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