Please ensure Javascript is enabled for purposes of website accessibility

5 Reasons to Invest in Hershey’s

By William Bias - Feb 10, 2014 at 8:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Why you should sweeten your portfolio with this candy company.

Investing from a business perspective and with a long-term mentality serves as your best bet for winning in the stock market. Holding on to shares of an excellent publicly traded business for a long period of time saves you money in terms of trading costs and taxes if the shares lie in a taxable account. Candy company Hershey's (HSY 0.83%) represents one of those companies. This company stands out from publicly traded competitors Tootsie Roll (TR 0.06%) and Nestle (NSRGY -1.40%). Here's why.

Market leadership
It's important to an investor that a company resides in a market leadership position that provides ubiquity and a wider degree of pricing power. According to its most recent earnings release, Hershey's regained its market leadership in the "candy, mint, and gum" category with a 31.1% market share in the U.S. Indication of declining sales of the most popular products of privately held Mars helped propel Hershey's to its No. 1 market spot. Last year, Hershey's revenue registered just north of $7.1 billion, far exceeding the $538 million in estimated revenue for Tootsie Roll. 

Strong brand
Market leadership also breeds a wider degree of brand recognition. When people hear the word "Hershey's," its chocolate bar with the brown and silver logo immediately pops into their head. The Reese's brand name also creates a huge draw among consumers. Reese's resides in the No. 1 spot as America's favorite candy in terms of sales.  In fact, five of the top 10 candies sold by Hershey's in the U.S. reside on that list.  Moreover, Hershey's sells Mounds, Almond Joy, and York peppermint patties. It's difficult to measure an intangible concept such as branding; however, consumer familiarity with the company products and its logos will continue to bring customers in. Hershey's still faces room for improvement globally as the Hershey's name still doesn't appear on Interbrand's list of top 100 global brands. Its competitor Nestle maintained a rank of No. 56 in 2013, up from 57 in 2012. 

Excellent fundamentals
The year 2013 proved very profitable for Hershey's. The company expanded both domestically and on the international front. Revenue and net income grew 8% and 24%, respectively. Hershey's gross, operating, and net profit margins increased 7%, 12%, and 15%, respectively.  New products, such as the Lancaster Soft Cremes Caramels and Brookside Crunchy Clusters, and its core product portfolio comprised of products such as the Hershey's Milk Chocolate bar and Reese's Peanut Butter Cups drove growth in the top and bottom lines. Hershey's sits on top of a solid balance sheet. Its $1.1 billion in cash represents 70% of Hershey's stockholders' equity. The company's long-term debt of 111% is less than the 146% at the end of 2012. 

Hershey's paid out 42% of its free cash flow in dividends in 2012. Expect a similar ratio for full-year 2013, when Hershey's releases its form 10-Q. Currently, the company pays $1.94 per share per year and yields 2%, providing income while you wait for capital gains.

Competition: Smaller and different
Tootsie Roll also represents a well-recognized brand; however, the company's size pales in comparison to Hershey's. Tootsie Roll's market capitalization of $1.8 billion translates into just 8% of Hershey's market cap of $22 billion. Tootsie Roll's year-to-date revenue declined 4%; however, the company seems to possess a firm grip on cost control and managed to expand year-to-date net income 11%.  

Nestle sells the Nestle Crunch, Butterfinger, and Kit Kat (outside the U.S.) brands.  In the international markets Nestle sells brands not so well known in the U.S,. such as Nestle Aero, Cailler, and Orion. The company certainly provides serious competition for Hershey's, which desires to expand globally. For example, the Kit Kat brand has met with market success in Latin America, Europe, and Nestle's  Asia, Oceania, and Africa segment. Moreover, product innovations like the Butterfinger bites will add to Hershey's competition in the snack size segment.

Foolish takeaway
Hershey's focus on product innovation, growing volume in its core products, and global expansion will serve as a recipe for capital gains and dividend increases. Hershey's keeps growing market share in emerging markets like China, where it recently achieved 10.2% market share. The company expects revenue growth of 5% to 7% in 2014. Tootsie Roll's focus on cost will drive bottom-line growth; however, its relatively smaller size means that it will eat Hershey's dust. Nestle will certainly put up a fight in international markets; however, Nestle sells more than candy, which means its focus is spread a little thin. Hershey's focus on candy will only increase its product quality and enhance its core competency. Add Hershey's to your Motley Fool Watchlist to get the latest news and feel free to do your own research to determine its investment worthiness.

William Bias has no position in any stocks mentioned. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Hershey Company Stock Quote
The Hershey Company
$227.11 (0.83%) $1.87
Nestle S.A. Stock Quote
Nestle S.A.
$120.55 (-1.40%) $-1.71
Tootsie Roll Industries, Inc. Stock Quote
Tootsie Roll Industries, Inc.
$35.79 (0.06%) $0.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.