by Jon Markman | May 9, 2012 11:04 am
My fondness for Hershey Foods (NYSE:HSY) is no secret, and believe it or not, it has very little to do with any love of chocolate. In fact, I have been allergic to chocolate my whole life and have never even tasted it.
But I do love the stock, which I first explained for you on Dec. 19 in this column and then updated for you on March 5 here. It was my pick for InvestorPlace‘s 10 Best Stocks for 2012 contest, and after a slow start is in fact beating the major market indices with a 10% gain through May 8.
Now I would like to revisit the story, and let you know what’s in store for the future.
Hershey remains the leader in the North American chocolate market with a 43% share of sales. Its dominance with its core Hershey’s Kisses line often can overshadow a number of iconic brands that you don’t immediately associate with the company.
Successful brands such as Almond Joy, Milk Duds, Reese’s, York Peppermint Patty, Kit Kat and Twizzlers — not to mention cookies and chocolate sauce — help define one of the best product lineups in the business. Hershey isn’t just candy bars in your local supermarket or convenience store, as its retail distribution network encompasses theater concessions, vending machine services and a food service division where Hershey products are one of many ingredients in other end products.
An example of the company’s food service division products include co-branded products like Dairy Queen blizzard desserts, Rich’s cookie dough made with Reese’s peanut butter, and Betty Crocker Ultimate Fudge brownies made with Hershey’s fudge. You see, the company dominates the dessert isle at your local supermarket, whether you see the name Hershey or not.
The unique manufacturing network consists of seven plants located primarily in the Northeast, with one plant located in Guadalajara, Mexico. This is the integrated network that allows Hershey to sell its 80-plus product brands in more than 60 countries around the world.
Click to Enlarge Recent quarterly results point to a market leader with no intentions of easing off the pedal. The firm increased its advertising and marketing budget and continues to introduce new products to the roster. First-quarter earnings of 96 cents per share came in a full 18% above analyst expectations and 32% higher than last year’s figures.
Additionally, the company was able to successfully raise prices to help offset higher raw materials including sugar, fuel and packaging costs. Few companies have the market position and pricing power to increase prices in a still-uncertain market environment like Hershey does.
This helped lead to a 11% increase in revenues and an adjusted gross margin improvement of 180 basis points, or 1.8%. In case you’re wondering, yes, improving margins in a rising raw materials environment is an extreme rarity, but it speaks to the economies of scale of the $15 billion leader.
While the outlook from chief executive John Bilbrey for the remainder of the year was cautious, he did slightly increase the company’s earnings expectations moving forward. Bilbrey is dedicated to building out the company’s international platform, recently announcing the acquisition of Brookside Foods, a private Canadian confectionery firm. The focus, however remains on increasing sales in emerging markets, so expect more deals in the near term.
The stellar results pushed HSY to a new all-time high last month, and it has not stopped even a day since, instead climbing despite the weakness elsewhere in the equity markets. HSY now trades at 19 times next year’s earnings expectations, a premium to its peers, but warranted given recent results.
If you factor in more favorable input costs for cocoa and sugar like many analysts are predicting, you’ll find very little reason not to own this 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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