I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Hershey (NYSE: HSY). Is this legendary candy maker the real thing? Let's get right to the numbers.

Foolish facts



Motley Fool CAPS stars (out of 5) ***
Total ratings 581
Percent bulls 82.3%
Percent bears 17.7%
Bullish pitches 83 out of 98
Highest rated peers Unilever, Kraft Foods (NYSE: KFT), H.J. Heinz

Data current as of Oct. 28.

Seriously? Fools can't make up their minds about chocolate? Apparently not. Shares of Hershey dropped more than 2% after the stock merely met Wall Street's $0.79 per-share estimate for the third quarter.

The stock has rallied some since, and for good reason. Hershey increased its full-year guidance in reporting earnings to $2.52 to $2.56 in adjusted earnings per share, The Associated Press reports.

Longer term, dividends are what makes Hershey delicious. The stock yields 2.8% at current prices, and management has increased its profit payout by an average of 6.8% a year over the past five years, according to Capital IQ. Those who've held shares since 1997 have seen their annual payouts more than triple -- from $0.42 to $1.28 a share.

Other Fools like Hershey because of its brand and pricing power.

"Just how threatened by store brands and substitutes do you think Hershey is? Their product is always the last thing you see just before you check out at many places. It just isn't worth taking a lower-quality substitute when you're probably eyeing a candy bar that costs less than a dollar, anyway," Foolish investor truthisntstupid wrote over the summer.

The elements of growth


Past 12 Months



Normalized net income growth 20.4% 14.5% (10.6%)
Revenue growth 6.2% 3.2% 3.8%
Gross margin 42.2% 38.9% 35.8%
Receivables growth 6.7% (9.8%) (6.6%)
Shares outstanding 227.6 million 228 million 227 million

Source: Capital IQ, a division of Standard & Poor's.

Judging by the numbers in this table, that investor is right. Let's review:

  • Net income growth is accelerating at a nice pace, reflecting not just revenue growth but also underlying improvements in the underlying business.
  • Gross margin, up more than six percentage points in two years, is where most of the gains appear to be coming from. Returns on capital are up more than seven percentage points over the same period, to 26.4%. Management is creating value for shareholders.
  • A stable share count speaks to the steady nature of the business. Management doesn't need to raise cash to fund operations or growth initiatives.

Competitor and peer checkup


Normalized Net Income Growth (3 years)

Hershey 4.3%
Kraft Foods 3.1%
Rocky Mountain Chocolate Factory (Nasdaq: RMCF) (10.3%)
Sara Lee (NYSE: SLE) 4.8%
Tootsie Roll (NYSE: TR) (2.8%)

Source: Capital IQ. Data current as of Oct. 28.

Hershey is one of the top performers among the big candy producers, and consequently is priced at a premium to the earnings growth analysts expect the business to achieve over the next several years.

Grade: Sustainable
And yet I see no reason to worry. A history of outsized cash flow provides more than enough for Hershey to continually raise its dividend while also funding confectionary experiments. That's a recipe for outperformance I can sink my sweet tooth into, and I've rated the stock to outperform in CAPS as a result.

Now it's your turn to weigh in. Do you like Hershey at these levels? Let us know what you think using the comments box below. You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

Interested in more info on Hershey? Add it to your watchlist by clicking here.

Unilever is a Motley Fool Global Gains recommendation. Heinz and Unilever are Motley Fool Income Investor picks. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.