A Bitter 2015 Bodes a Sweet 2016 for Hershey (HSY)

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Hershey (HSY) is one of the most iconic brands in the global marketplace. As America’s leading confectionery maker — with brands such as Twizzlers, Reese’s, York and Jolly Ranchers, as well as about 80 other brands around the world — it is about as ubiquitous as any brand in every grocery or convenience store in the country.

Hershey HSY

It’s no surprise that Hershey holds 45% market share in the U.S. confectionery sector. In 2014, HSY did about $4.7 billion in sales, and likely did slightly better in 2015, but not by much.

Last year was tough for HSY stock. Management bought a high-profile Chinese chocolate company, and it was hoping that growth in China would help the top and bottom lines. Unfortunately, that didn’t materialize as the Chinese economy continued to struggle and Chinese consumers weren’t buying much chocolate.

What’s more, the strong U.S. dollar made it tough to grow revenue overseas.

Hershey Looking to Become All-Natural

Domestically, HSY is transitioning away from beet sugar to all cane sugar to avoid genetically-modified sugar beets. According to a company spokesman, about 75% of sugar is now cane sugar, and HSY projects that it should be producing most of its products with non-modified cane sugar by the end of this year. Management also pledged to remove all artificial ingredients in its products in the near future.

That kind of transition and repositioning is a massive undertaking. It’s not just about throwing a few levers or switching a distributor or two. Management has to sort out long-term contracts with sugar beet growers and find cane sugar at the right price. That can become a distraction to operations, especially in a less-than-stellar economic environment.

To top it all off, HSY also cut guidance halfway through 2015, which brought serious selling.

But, this isn’t a cautionary tale to make you avoid HSY. In fact, all of this spells opportunity.

HSY has been around since 1894. Suffice it to say the company has seen some good and bad times over the years. And it has not only endured, but thrived.

Hershey Aims to Improve Its Reputation

Its move toward all-natural ingredients is a cultural shift and signifies that HSY is looking to build its reputation beyond being a cheap, everday chocolate or candy.

It could have simply bought a bunch of niche, high-end chocolatiers (which HSY already owns, actually) and been satisfied with moving to the high end. But, management made a bold decision to upgrade its entire line, which will help a great deal as chocolate becomes a “healthy” snack in many consumers’ minds. That’s the kind of decision that a company with a long-term vision makes. And it’s why we like HSY.

As it goes “all-natural,” it will likely be able to charge more for its confections, a good move to expand margins in a slow-growth world. Bear in mind, HSY had 38% gross margins in 2005; a decade later they were 45%. Management knows what it’s doing.

HSY isn’t going to bounce back like some tech stock. It will take a while for its transition to reap benefits, and that is why it’s a great time to buy Hershey stock, while it’s cheap. In return, you get a nice inflation-beating 2.7% dividend as well.

Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.

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