When candy company Hershey (NYSE:HSY) shook up its board of directors on November 11, it certainly didn't opt for no-name rookies. Among the eight new faces are Tom Ridge, former secretary of Homeland Security, and Edward Kelly, a managing director of the Carlyle Group.
According to Kenneth Wolfe, Hershey's non-executive chairman, the new recruits were brought in to "recharge growth and take advantage of all opportunities we see in the marketplace." In short, the fact that Hershey is rejigging its board is a great sign for the common shareholder. (To learn more on the value of a strong board, see Evaluating A Company's Management.)
Friends in High Places
The Hershey Charitable Trust (which owns almost 78% of the company) had requested that six of the board members resign. And when they did, two others resigned as well. Again, the reason behind the shuffle is the company wanted new blood who could deliver growth and therefore enhance shareholder value.
Among the new directors hired was Tom Ridge, who you might remember as the first Secretary of Homeland Security. Ridge is also currently president of Ridge Global, a global strategic consulting company. One other new hire that stood out to me was Edward Kelly, a managing director of The Carlyle Group.
For those unaware, The Carlyle Group is a big name private equity firm, which leads me to believe that perhaps the company may be considering some sort of business combination or perhaps even putting itself up for sale. Earlier this year there was speculation on Wall Street that the company might combine forces with Cadbury Schweppes (NYSE:CSG).
Competition Heating Up
I think Hershey is getting serious about driving its top and bottom line right now, because the company is seeing increased competition from the likes of Nestle and other players in the snack food business. Another potential factor is that it's also seeing the cost of ingredients such as milk rise dramatically. In short, I believe that Hershey needs to act now in order to remain competitive, and of course profitable.
At the moment, Wall Street expects Hershey to earn $2.09 a share this year and $2.18 a share next year. However, I'm skeptical this is possible, especially when it comes to the 2008 estimates. Over the last 90 days the analyst community has reduced its estimate to $2.18 a share from $2.44 a share. This is a fairly dramatic cut. To me it signifies that the analysts who follow the company, and arguably know much more than the general investment public about it, are having a tough time getting a bead on the future direction of earnings. Another concern is the price of certain foodstuffs has risen over the past year and I see no relief in sight. The same holds true for labor costs.
Time To Drop The Small-Town Persona
Although it is known throughout the world, Hershey is still essentially a small-town company and I view this as a bit of a negative. For earnings and the stock to really take off, the company needs to expand its distribution network, and perhaps source more overseas labor to trim costs. I am hopeful that the new board members will begin doing this.
Bottom Line
Hershey has hired a new board of directors that is expected to grow the company and enhance shareholder value. I think that this is terrific news for the company, and believe it's just a matter of time until the stock starts to react to this good news.
To continue reading on this subject, try Putting Management Under The Microscope.)
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