When the market turns sour, investors usually turn to defensive stocks, companies that make essentials people will keep buying even in a recession.
While the S&P 500 is down by 6% in the last three months, starting in early September, Hershey (NYSE:HSY) shares are actually up 4.3%. This despite a September earnings report that missed analyst estimates, although it did show a profit of $263.7 million, or $1.25 per fully diluted share.
Investors had been expecting $1.55 per share; and revenue also missed, at $2.08 billion instead of the $2.09 billion analysts wanted. The shares fell, but quickly recovered, and HSY stock opened for trade Dec. 7 at $108 per share, about where it was before the earnings came out.
Why the Chocolate Love?
There are always excuses when a company defies the general market direction.
Hershey has been buying companies outside chocolate, like Amplify Brands, which makes popcorn under the name SkinnyPop, and Pirate Brands, which makes cheese puffs. CEO Michele Buck has talked about becoming a “snacking powerhouse.”
Analysts also praise its production efficiency, cutting costs and improving margins. Also, there are new “innovative” snacks coming from its core brands, like Reese’s Thins, a skinnier version of its peanut butter cups.
But this is not a growth company. Revenue is up only 1% overall in the last three years, although 2018 looks to be a much better year, with net income for nine months already ahead of last year’s $756 million.
If this were a go-go market, Hershey’s performance, and its stock, would not be a headline to anyone outside the city. But this is not a go-go market. This has become a uh-oh market. And in that kind of market companies like Hershey are highly prized. You may not need more silicon chips, but pass the chocolate chip cookies, please.
A Defensive Market
This, in the end, is why investors are told to be diversified. When aggressive names like Amazon.Com (NASDAQ:AMZN) fall, defensive names like Hershey stay strong.
In ordinary times, like a few years ago, the only reason to buy HSY stock was in hopes of a takeout. But those were dumb hopes.
Hershey’s rejected a $23 billion buyout offer from Mondelez (NASDAQ:MDLZ) in 2016 and was able to make that stick because a trust created by founder Milton Hershey, who died back in 1945, still controls 81% of the voting shares, although it regularly sells shares to fund its charitable work. Its market cap as trade opened Dec. 7 was $22.7 billion.
If this were not a bear market, Hershey management would be criticized as being insular. It declined to buy the U.S. business of arch-rival Nestle, which went to the Italian company Ferraro for $2.8 billion, a price Hershey could have easily afforded. It then sold a Chinese business and a British chip business acquired with Skinny Pop, saying it wanted to be more U.S.-focused.
The Bottom Line on HSY Stock
Hershey is what it is.
Hershey is a conservative snack food maker, based solidly in central Pennsylvania, and still controlled from the grave by its founder. When my kids were small, we took them on the Hershey factory tour, at the end of which they were each handed a chocolate bar. They still talk about it.
In normal times, this is not the kind of stock you want to own. Its dividend yield is just 2.72% — no great shakes as interest rates are rising — and it’s not growing.
But it’s not going away. People still like sugar and they still like salt.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.