Milton Hershey founded the company in 1894 when he decided to shift focus away from his Lancaster Caramel Co. to chocolate instead. He built a milk-processing plant a couple years later and eventually refined what later became known as the “Hershey process,” a trade secret for manufacturing chocolate candy with milk. This type of chocolate is the main taste that Americans know, but it’s not the only chocolate taste available in the world.
More than 30% of Hershey shares remain owned by the Milton Hershey School Trust, which funds a private school that Hershey and his wife founded in 1909. The company is in good hands with Chief Executive John Bilbrey at the helm. He took over recently after serving in various management roles since 2003. He’s a former executive with Danone (PINK:DANOY) and Procter & Gamble (NYSE:PG), and is reported to have a deep understanding of the business.
Hershey has averaged earnings growth of 33% over the past three years and is the best operator among peers, having exhibited inventory improvement in six consecutive years. It has done a particularly good job of reining in costs and improving efficiencies, leading to $180 million in annual savings. Another $80 million in cost cuts is targeted over the next three years.
Despite its long and storied history, Hershey plans to stay aggressive in its growth plans, focusing future efforts on international expansion, where it currently generates only 15% of its revenues. I like this upside. Earlier this month it acquired Canada’s Brookside Foods and according to management looks to double its non-North American business from about $500 million to $1 billion by 2015.
Brookside’s expertise lies with chocolate-covered fruit, fruit juice and nuts, where it holds several patents. According to Thilo Wrede, an analyst with Jefferies, this purchase will be immediately accretive to earnings and further expands Hershey’s product portfolio.
Investors have rewarded the shares this year, as the stock is up nearly 25%, and you may be interested to know that it also performed well in 2008, 2004 and 2000. Chocolate really does make people feel better: It’s not quite a drug, but it has properties that promote a mild sense of well being. Consider it an affordable luxury for difficult times.
In sum, Hershey is a best-of-breed operator that deserves and gets a premium valuation. Even in a tough environment, it could appreciate by 10% or more. If you’re willing to be patient, split your purchase into thirds. Buy a third at year-end, a third at $56 limit and a third at $54 limit.