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‍INTRO

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Most of us are very familiar with Hershey's chocolate. We all have our favorites, and maybe Hershey's isn't top of the list in chocolate for you. But it's a very popular brand, and it's been around for quite some time. Demand and consumption of this chocolate mainstay persists! The question for us, is whether it makes a great investment.

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The Hershey Chocolate Company was actually founded wayyyy back in 1894. Six years later, the first Hershey chocolate bar was sold! And today the company exists with a portfolio of over 90 brands and products, including chocolate, various sweets, mints, and other snacks.

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Hershey went public back in 1985 and continues to trade today on the NYSE under the ticker HSY. Since then, investors in Hershey stock have experienced a return on investment (ROI) of +1,424%. (This is just based on stock appreciation alone. Of course, the dividends paid out and share repurchases made by the company have only made the ROI even greater. Read more below.)

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With so much focus nowadays on high-growth, Big Tech companies, there are still hidden gems to be found elsewhere with solid potential. Hershey may be one of those hidden gems. The stock is currently down -21.5% in the past year, but starting to tick back up YTD.

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Operating History

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Growth

As a very mature, well-established company that has been publicly traded for quite some time, growth has slowed for Hershey, right? More recently YoY growth in revenue was 7.1%, which is decent, especially for a company its age and size. For comparison, General Mills grew 4.1% last year and Kraft Heinz grew a mere 0.59%.

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Focusing more on any long-term growth trend, Hershey grew at an average of about the same amount in the last 5 years:  7.5%. Not bad. Earnings are also growing, albeit at a moderate rate of approximately 13% in the last year and on average over the past 5 years.

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We can take a look at the Underlying Metrics dashboard from Tykr that provides a visual and a rating with respect to key metrics of ROIC, EPS growth, Equity Growth, and Sales Growth, and Cash Growth.

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What stands out in the above image is the high rating of ROIC and Equity Growth, indicating an excellent job of management deploying capital to generate returns and and a great job of managing retained earnings.

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Management's Effectiveness

In fact, taking a closer look reveals, that return on equity (ROE) currently stands at an excellent level of 50.3%. The 5-year average 67.0%. Return on invested capital (ROIC) stands at an attractive 17.9%, with a 5-year average of 17.5%, and return on assets (ROA) sits at a splendid 15.6%, with a 5-year average 14.7%.

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All of this suggests that management is doing an excellent job of deploying capital and leveraging its assets.

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Other Aspects

The level of debt exists at a perfectly manageable level of 125% if you focus on that metric. And looking more closely, the level of earnings is about 11.6 times its interest expense. So, without needing to dig into its equity base, the company is perfectly able to manage its debt level with earnings. This is a very good sign.

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Retained earnings have been growing steadily since 2019, averaging a growth rate of nearly 37%. The balance sheet now reflects $4.6B in retained earnings. Hence, the high rating of Equity Growth in Tykr.

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And while revenue and earnings growth have slowed to moderate levels, the company is rewarding shareholders with strong dividends. The level of dividends paid out grow YoY at 15% in 2023, and the average dividend growth rate in the last 5 years is 9.2%. It currently sits at $5.48, translating to a yield of 2.83%. So, even without any further stock appreciation, the level of dividend payouts is strong enough on its own to provide a decent return.

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Competitive Advantage

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Hershey's biggest advantage is none other than its brand. The brand is strong and widely recognized. Customers associate Hershey with quality and trust. However, the company has to protect its brand image on an ongoing basis.

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The Hershey Company is the leading U.S. chocolate firm, with over 44% of the U.S. confection market. Mars (privately-owned) holds second place with ~30% market share. It's got a wide economic MOAT.

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And as detailed in this article by Forbes, Hershey not only holds a strong brand as its competitive advantage, but it is also highly innovative. It has proven successful in innovating new variations of existing products or updated packaging to improve shelf appeal, to keep consumers buying its products.

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It also maintains strong distribution, product placement, and marketing activities to support its operations and resulting in steady cash flows. In the past 10 years, free cash flow has grown YoY at an average of 26%. The company also maintains a consistent Share Repurchase program, spending $300B in buybacks in 2023. Find out more about why we love buybacks in a prior article Share Repurchases.

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Future Outlook

Hershey had a solid 2023 characterized by solid top- and bottom-line growth. It's got pricing power stemming from those iconic branded products.

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Despite higher sugar and cocoa prices transpiring last year, Hershey managed to decrease their overall cost of goods sold (COGS) even as revenues grew by 7.2% in 2023. The company demonstrated sound strategy to nevertheless increase supply-chain efficiency.

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The last few months have seen a decline in Hershey stock (down -14.8% in the past 6 months and down -21.5% in the past year) as an unappealing outlook for both the macroeconomic backdrop and cocoa prices have placed a damper on investor optimism in Hershey’s stock. Higher input costs in the near-term may likely create operational challenges and drive the stock down further in 2024. But this may present buying opportunities for the shrewd buy-and-hold value investor.

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In the long-term, it's likely the company will continue to leverage its wide economic moat to capture sales, grow their market position, and generate great returns for shareholders. The combination of a 15% dividend increase last year and its ongoing share repurchase initiatives provides a strong vote of confidence from Management.

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Long-term profitability, operational health and success, and shareholder value are all a huge part of Management's focus. Any short-term hiccups are likely to be temporary while the long-term outlook remains bright.

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Conclusion

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You won't experience as much upside in appreciation of the stock as we've seen with other high-flying stocks. Hershey is certainly no Nvidia. But it does exist as a very solid operation with moderate growth potential, consistently great returns, and high dividend payouts.

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Nevertheless, this analysis is by no means a recommendation to buy the stock. This is just quick, summary level overview, so more research should be done. Additionally, Hershey faces some macroeconomic challenges in 2024, which could potentially result in weaker sales. And at this time, it appears it may now be fairly priced rather than a buy. This is also reflected in the rating and guidance provided by Tykr.

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But any decline in the stock price should be weighed carefully with a long-term lens...as a potential buying opportunity. So, is Hershey a sweet deal? You decide. I view it as a great business and a solid investment well-positioned as a part of an investment portfolio. But, as always, please be sure to do your own research and come to your own conclusions.

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Disclosure/Disclaimer

As a Tykr affiliate, Raising InvestorIQ earns from qualifying purchases. As a Seeking Alpha affiliate, Raising InvestorIQ earns from qualifying purchases.

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Information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions.  I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.

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