It was a busy year for Hershey (NYSE:HSY) in 2005. New name, new products, new Chocolate World in Chicago, and a full year of sales from Mauna Loa and Grupo Lorena. It was also more of the same old boring predictable stuff, too. The dividend increase in August marked the 31st straight year that dividends have been increased. Anyone still holding shares from 1975 would now be making twice what they paid for those shares every year in dividends.
It was the same old routine for the financials, as well. Full-year net sales increased 9.2% to $4.836 billion from $4.429 billion. Mauna Loa and Grupo Lorena were acquired in Q4 of 2004, which lowered the Q4 increase to 6.7%. That's still considerably higher than the long-term goal for organic growth of 3% to 4%, which is becoming a recurring theme. Excluding charges associated with "business realignment" and a one-time tax benefit realized in 2004, 2005 diluted EPS rose 13.4% to $2.28 from $2.01, well above the 9% to 11% long-term goal.
As my Foolish colleague Rich Smith pointed out yesterday, margin pressures have been a concern lately, especially with the rising price of a number of commodities -- cocoa in particular. That fact has been reflected in the downward movement of the stock since it reached a 52-week and all-time high of $67.37 on May 12, 2005. But there doesn't seem to be much to be concerned about right now. For the year, pro forma gross margins, which adjust for the effect of acquisitions in the form of a business realignment charge, increased 30 basis points to 39.1%, while operating margins increased from 19.9% to 20.3% (also adjusted to reflect business realignment charges). Excluding last year's $61.1 million income tax benefit, net margins increased slightly to 11.7%.
The company looks to continue to improve on these margins throughout 2006 by continuing to focus on the "value-enhancing strategies" that it has implemented. Along with the positive response from consumers to new and revamped products, guidance continues to top the long-term goal of 9% to 11% for diluted EPS, as well as the previously mentioned organic growth.
Forget all that boring stuff, you say, and tell me when Hershey is going to get hip! I think that process has already begun. Carrie Underwood was signed on as a spokeswoman to sing the jingles for Almond Joy, Mounds, and Kit Kat. With my affinity for chocolate and the added incentive of a free T-shirt for succumbing to it, I'll admit that I was taken in. You'll find proof of that in my waistline. The new T-shirt probably won't fit me for very long.
Of course, the most important thing to consider is whether the value of the business is reflected in the price of the stock. At today's prices, Hershey is trading at roughly 19.8 times forward earnings and a PEG of a little above 2. To me, it looks like the company is fairly valued -- maybe even overvalued.
But I don't get worked up about high PEG numbers, since sustained growth rates can mislead investors, especially over longer time periods. With the success of the recent innovations to the product lines and the potential for significant international growth, the company may be entering one of those periods. Adding the almost 2% yield to the more than 11% growth in diluted EPS, and taking into account the historical dividend growth, you might want to contemplate whether, 30 years from now, you might be the one making twice your original investment in dividends.
John Bluis doesn't own any shares of Hershey, but he does lay claim to consuming 15 candy bars in a month. He has the T-shirt to prove it.
