In part four of this five-part series, we look at the maker of one of America's favorite treats, The Hershey Company (NYSE:HSY). Its stock has outperformed the market in 2013 and I believe it could easily match this performance in 2014. Let's take a look at the catalysts for Hershey's growth over the next 12 months and why investors should be buying in right now.
The chocolate master
Hershey is one of the largest producers of chocolate and confectionery products, candy, and gum in the world. It is home to over 80 brands which include Hershey's, Reese's, Kit Kat, Twizzlers, Jolly Rancher, and Ice Breakers. The company also offers premium and artisan chocolate products under brands such as Scharffen Berger and Dagoba; these premium products are offered through the Artisan Confections Company, one of Hershey's wholly owned subsidiaries.
A year in review
2013 has been a great year for Hershey; its stock has outperformed the overall market, rising 29.53% as of Dec. 27, while the S&P 500 has gained 25.87%. Here's a look at a summary of the four earnings reports Hershey released in 2013 and a chart of the rally they supported:
|Quarter||Q4 '12||Q1 '13||Q2 '13||Q3 '13|
New products, India, & China
This past year was great for Hershey, but 2014 has the potential to be the start of an explosive run higher. I believe this because Hershey is bringing a new product to the United States, it is expanding its presence in China, and it is introducing an existing brand to the Indian market.
The new product coming to the U.S. is a line of caramel chews under the brand name Lancaster; this will be the first new brand introduced in the U.S. by Hershey in 30 years. Lancaster was initially launched in three Chinese markets earlier this year and it will become available in the United States in January, and it will also see wider distribution in China. I believe new product development will become more common for Hershey in the next few years and this will be a key driver for earnings growth.
Over the last several years, Hershey has been increasing its presence in the Chinese market. The Lancaster line of caramel chews was another move in this chase, but December brought the company's largest move yet; On Dec. 19, Hershey announced the largest acquisition in its history when it bought an 80% stake in the "iconic" Shanghai Golden Monkey Food company for $584 million. The Golden Monkey brand is one of the most recognizable in China and it brings a whole new line of products to Hershey's repertoire. This move will also allow Hershey's brands to join Golden Monkey's large distribution channels. I believe this was a very strategic and genius move on Hershey's part and it will pay dividends immediately.
2014 will also mark the debut of the very popular Jolly Rancher brand in India. This is the first international market for the Jolly Rancher brand outside of North America in the brand's 65-year history. Hershey's Indian headquarters said that Jolly Ranchers are perfect for the "sweets-loving consumers" and the potential is incredible when you consider that India is home to the world's second-largest population with 1.2 billion people; It also stated, "We've tailored our new Jolly Rancher products for India to appeal, specifically, to local palates." I believe that the Jolly Ranchers brand has massive potential in India and this could lead to further expansion over the next few years.
Where could it go?
Today, Hershey trades at roughly 26.8 times trailing-twelve-months earnings of $3.59 and 23.4 times 2014's earnings expectations of $4.12. According to YCharts, the company's five-year average price-to-earnings ratio is 24.28, but I believe it could trade at a fair multiple of 27 next year due to its new products and product expansion; a multiple of 27 would place it upwards of $111 per share by the conclusion of fiscal 2014, an increase of 15.3%. I believe a run of 15.3% would suffice for Hershey to outperform the S&P 500 in 2014 and a few earnings beats could propel it much higher.
Slowed growth for the competition
One of Hershey's largest competitors in the marketplace is Mondelez International (NASDAQ:MDLZ). Mondelez owns many chocolate brands such as Cadbury, Cote d'Or, Suchard, and Milka, while also owning popular biscuit, gum, coffee, and powdered beverage brands. The company is a global powerhouse, with its brands available in 165 countries.
In its most recent quarter, Mondelez reported mixed results, with earnings growing 10.8% and revenue increasing just 1.8%. Analysts expect the company to grow full-year earnings by 9.6% in 2014, all while paying a respectable 1.6% dividend. Mondelez also has a $7.7 billion share repurchase program in place, which will help keep earnings per share on the rise. This could all result in a great run in 2014, but I do not think Mondelez has enough earnings and revenue momentum to outperform Hershey.
The Foolish bottom line
The Hershey Company is an American icon that has been building value for its investors since it went public in 1927. Its stock has outperformed the market in 2013 and I believe this trend will continue in 2014. Aside from price appreciation, the stock will provide additional returns via its 2% dividend and share repurchases. Keep a close eye on this one and consider adding it to your portfolio.
Joseph Solitro owns shares of The Hershey Company. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy.