by Jon Markman | March 5, 2012 11:34 am
If the market takes a timeout to consolidate recent gains this spring, consumer staples stocks — and particularly food makers — will regain their place on center stage. In that context, let’s take a quick look at one of my favorites, Hershey (NYSE:HSY) — my pick for the Ten Best Stocks for 2012 contest, and the largest candy manufacturer in North America, controlling a whopping 43% of the market for chocolate.
The company is not dependent on its iconic product, as divisions make cookies, snack bars, baking ingredients and beverages as well as brands like Reese’s and Bubble Yum. Headquartered in Pennsylvania, it’s a sprawling $13 billion outfit whose products are sold in 60 countries. It generates more than $5 billion in annual revenues and employs nearly 14,000 people.
There are many more exciting companies around, but investing is not supposed to be exciting. Looking out over the rest of the year — which still could face a lot of fallout from European sovereign debt woes — I would rather put my hard-earned funds in the care of a proven, stable growth machine like Hershey than with some tech company whose products could be rendered obsolete by the next hotshot to emerge from Stanford with a gleam in his eye.
It’s difficult to avoid products manufactured by Hershey, as they are well placed at check-out stands around the world to capture shoppers’ impulse to indulge after a shopping session. You need clout to put your product at the cash register, and that is something the firm has in spades.
Milton Hershey founded the company in 1894 to take advantage of his invention: a cost-efficient and delicious method of making chocolate candy with milk. A century later, the process of making milk chocolate remains a trade secret as closely held as the Coca-Cola (NYSE:KO) recipe.
Today, the company remains in good hands with chief executive John Bilbrey at the helm. The former Danone (PINK:DANOY) and Procter & Gamble (NYSE:PG) exec took over recently after serving in various management roles since 2003. He knows the business from the inside out.
Click to EnlargeDespite its long and storied history, Hershey plans to stay aggressive in its growth plans, focusing on international expansion. It has a lot of room to grow, as only 15% of revenues at present come from outside the United States. Investors have rewarded Bilbrey’s overseas efforts by pushing shares up 17% over the past 52 weeks, but there is plenty of room for valuation to expand along with earnings.
The company has averaged earnings and operating income growth of 26.4% and 21.4%, respectively, during the past three years and is the best operator in its peer segment, having exhibited inventory improvement in six out of the past seven years. Hershey has done a tremendous job of reining in costs and improving efficiencies; it recently announced $180 million in annual savings, with another $80 million in additional cost savings targeted during the next three years.
Hershey reported fourth-quarter results a few weeks ago that saw organic sales and volume growth that both exceeded management guidance and analyst expectations. The firm went 4-for-4, increasing earnings and revenues, and lifting both the dividend and 2012 guidance. Plus, Hershey’s focus on expanding international sales paid off, as it reported 25% growth in its top targeted markets: Mexico, China, Brazil and India.
That means for the year, Hershey grew net income 23.4% on just over 7% revenue growth, which is very cool. Not a lot of other companies can claim an average of 26.4% earnings growth annually over the past three years.
The lone recent negative would be the quarterly decline in gross margins, but according to Morningstar analyst Erin Lash, this stemmed from the company’s Project Next Century restructuring initiative. The goal is to transition production from the company’s century-old facility on East Chocolate Avenue in Hershey, Pa., to a more modern facility. Management anticipates margins will improve by 75 basis points this year as volumes accelerate.
Hershey increased its dividend over 10% to 38 cents per share from last quarter and has grown it 21% the past three years. That’s what the top performers do: return rising cash flow to shareholders.
The company feels strong about its future, as Bilbrey raised the company’s previous 2012 earnings growth guidance from a 6%-8% range to a 9%-11% range. This is despite the fact that overall, the production of candy in the U.S. grew by just 2.8% in 2011.
Hershey’s sales in the core candy, gum and mint segments are trending higher, as they grew 4.5% last quarter, above the average historical growth of 3% to 4% annually. Margin improvements and international expansion is what will drive this candy maker in the future.
From a seasonal point of view, moreover, the next 21 days tend to be very sweet indeed, as HSY has risen over that span by an average of 3.5% in each of the past seven years, with spikes as high as 5% to 9% from here. I love how Hershey tends to do well in the years that are the toughest for all other stocks. It advanced in rough-and-tumble 2001 in the next 21 days by as much as 13%, and in dreary early 2008 and 2009 by as much as 4.7%.
You can buy Hershey now, or if you are patient you probably will have a chance to buy the stock on a dip back to $59.50 on a modest market setback, or at $55 on a larger one.
Jon Markman operates the investment firm Markman Capital Insights. He also writes a daily trading newsletter, Trader’s Advantage, and a long-term investment service, Strategic Advantage. Check out his Top Stock for 2012 here.
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