Hershey through my 'first look' lens
After my July 2 e-mail about Swiss chocolate maker Lindt (CHLSY), many of my readers asked me to take a look at Hershey (HSY).
As one of them, Peter B., wrote regarding the stock of this American icon:
Today, you can buy another legendary chocolate maker and Warren Buffett favorite at less than half the price to earnings and only 3.3 times sales. It has consistent growth in revenues, though more recently, its salty snacks have caused some hiccups. Might be worth a comparison.
I was puzzled by Peter's comment about Hershey being a Buffett favorite, since the legendary investor has never owned the stock. But it's definitely the kind of business he admires, as he mentions in this old one-minute clip.
So as requested, today I'll discuss the stock through my "first look" lens...
Taking a look at the 20-year price chart, we can see that the stock did tremendously well for most of this period, peaking at $276.35 on May 1, 2023. But since then, it has fallen by 40%, closing yesterday at $164.64:
As is the case with most companies, the stock has generally followed Hershey's growth in revenue and net income over the past two decades:
Note also how recession resistant Hershey is, as revenue and profit rose during both the global financial crisis and the COVID-19 pandemic.
The cash-flow statement tells a similar story, as operating cash flow has always exceeded capital expenditures ("capex"), resulting in strong and growing free cash flow ("FCF"):
So why is the stock down so much in the past two years? To answer this, we must look more closely at quarterly numbers over the past five years, including the first quarter of this year. Here's revenue and net income:
We can see that revenue and profits have fluctuated wildly the past six quarters, with the most recent one being a total bust – revenue and net income were down 13.8% and 71.9% year over year ("YOY"), respectively.
The quarterly cash-flow statement tells a similar story, with FCF down 29.4% YOY in the latest quarter:
Meanwhile, Hershey has a modest net debt of $4.8 billion:
To see why debt has risen over the years despite strong FCF, let's take a look at the company's capital allocation:
Hershey makes many small acquisitions and the occasional large one. The most notable are Amplify Snack Brands, maker of SkinnyPop, in January 2018 for $1.6 billion... Pirate Brands in October 2018 for $420 million... Lily's Sweets in June 2021 for $425 million... and Dot's Pretzels later that year for $1.2 billion.
In addition, Hershey pays a rising dividend, with the stock currently yielding a healthy 3.4%. And it has averaged $431 million per year in share repurchases since 2012, reducing the diluted share count by 11%:
Overall, Hershey's financials are excellent, though they've weakened in the past year and a half – especially in the first quarter of this year.
Lastly, turning to valuation... As of yesterday, the company has a market cap of $32.8 billion and an enterprise value of $37.6 billion. It's trading at 3.5 times enterprise value to trailing revenue and 27.7 times analysts' consensus estimates of $5.94 per share for this year. (Note that the company earned $9.37 per share last year, so the stock is only trading at 17.6 times last year's earnings, but analysts don't expect it to surpass this level until 2029.)
Hershey is clearly a great, recession-resistant business with a long track record of stellar financial performance. But it's encountering some headwinds.
That would inevitably lead investors to ask some tough questions:
Is this business fundamentally broken and in decline, in which case its stock is a value trap?
Or is the market overreacting to short-term issues that will go away – thus making the stock a buy?
On Monday, I'll continue the conversation on Hershey... Stay tuned!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.