In a nutshell, Hershey doesn't expect its business to grow to plan for fiscal 2006. Because of a product recall and plant closure in Canada, and a tepid outlook for sales in the United States, Hershey believes that its sales growth may come in below its long-term goal of a range between 3% and 4%. Furthermore, growth in diluted earnings per share will fall only somewhere around a mid single-digit percentage -- previously, the company was hoping for somewhere between 9% and 11% in earnings appreciation. Fiscal 2007 should see the stated sales-growth goal, but earnings growth will be between 7% and 9%.
You know what happens after such news is released -- downgrades are fast in coming, as well as a falling stock price. Goldman Sachs took Hershey's stock rating down to neutral from buy. Investors took the price of the stubs down by $1.72 yesterday, representative of a 3.4% decrease. The stock closed at the low point of its intraday trading range, and volume was quite heavy, showing a significant amount of conviction behind the selling.
I can see the reaction. After all, we all know about Wall Street's game. You have to beat expectations -- always, no exceptions. If you don't, then a bloodbath of selling will ensue.
While that may be, I would urge shareholders of Hershey to consider sticking with the stock. For one thing, who can possibly resist the Reese's peanut butter cup? OK, that's not a reason. The real reason is that Hershey is a great long-term hold. I mentioned my admiration for the company as a potential investment idea in a recent take on its Q3 earnings, which were, like the current guidance, anything but sweet.
Yet Hershey will be around forever -- and if not that long, then for a pretty large amount of time, enough to take you to retirement. If you have, say, decades until your golden years and are looking for a nice dividend investment, Hershey might fit the bill. Its quarterly dividend has experienced wonderful increases over the past decade -- in fact, just this past August, the company's board saw fit to up the payout by 10%. Granted, a look at the most recent 10-Q shows that free cash flow has been challenged as of late -- free cash flow for the nine-month period was roughly $107 million while dividend payments were about $174 million.
Going to the latest 10-K, however, gives us a more positive reading. In the cash-flow review for the past three fiscal years, Hershey's net cash from operations was enough to cover acquisitions, capital expenditures, and dividend commitments. I believe such strength in cash flow will continue in the future, since Hershey is, like Tootsie Roll
Any company you are involved with will guide down at times. You have to decide whether the long-term story is still intact. I think it is with Hershey, and I think you can dollar-cost-average the stock with reasonable confidence.
More Takes on Hershey Foods:
- Hershey Needs a Chocolate Fix
- Hershey Gets Swanky
- Hershey knows that the sweetest thing to shareholders is a dividend increase.
Wrigley is an Income Investor recommendation.
Fool contributor Steven Mallas owns none of the companies mentioned. He is a big fan of the Reese's peanut butter cup. As of this writing, he was ranked 2,157 out of 15,216 investors in the CAPS system. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.