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Hershey Sale Hopes Melt

Posted: Jun 18, 2008 11:39 AM by Glenn Curtis

Tickers in this Article: HSY, SBUX, CBY, DPS, WWY

Shares of well-known chocolate company Hershey (NYSE:HSY) are hardly a sweet deal these days. Stiff competition, lackluster financial results, and a recent comment by the chairman of a trust that has a controlling interest in the company make the stock a non-starter in my book.

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Let's explore that bitter taste that Hershey is giving investors lately.

Controlling Shareholder Pulls The Plug
There has been speculation that Hershey could combine forces with another candy maker such as Cadbury (NYSE:CBY). Word that Mars is going to buy Wrigley (NYSE:WWY) has only fueled the speculation.

However, those hoping for Hershey to link up with another deep-pocketed player can stop holding their breath. Reuters reports that LeRoy Zimmerman, chairman of the Hershey Trust, which owns a 78% of the voting stock, said there are no plans to sell the trust's stake. This is bad news for a two reasons.

First and foremost, it takes a big catalyst for the shares off the table. The second problem is it gives the impression that Hershey might end up sitting on the sidelines generating lackluster earnings as other big-name players outflank it. Frankly, I think it was a lousy move that will only serve to depress the value of the trust's holdings.

The Financials
When you start to look at the numbers, the first thing that stands about Hershey is its lack of growth. In its first quarter ended March 30, the Pennsylvania-based company reported sales of about $1.16 billion, which was only a smidge north of the roughly $1.15 billion it booked in the comparable period last year. Meanwhile its gross margins dropped to 32.4% from 35.9% in the same period last year. And finally it generated income of about $63.2 million (28 cents per share) well below the roughly $93.5 million (40 cents per share) it turned in last year. (Find out how to find and calculate these numbers in our Advanced Financial Statement Analysis tutorial.)

What's worse is that there is little hope for an improvement. Management said it expects the company to post sales growth of 3-4% for the full year. On the earnings front it's expecting to earn $1.85-1.90 per share from operations. That means the company trades at about 19 times the current year forecast. Again the year-over-year comparisons don't impress me. (Learn how to look deeper into a companies earnings to gauge true performance, in our related article Earnings: Quality Means Everything.)

Can't Beat Cadbury
Next consider how Cadbury's confectionary business is faring. You know Cadbury; it's the company that makes gum and those delicious little creme-filled eggs.

In its first quarter Cadbury, which recently separated itself from the Dr Pepper Snapple (NYSE:DPS), saw its confectionary sales grow 7% (exact numbers were not broken out). Management also included the following tidbit, which made me optimistic about the remainder of the year: "We confirm our previous 2008 guidance of revenue towards the upper end of our 4-6% goal range and meaningful margin progression."

Analysts are expecting Cadbury to earn about $3.16 a share this year according to numbers from MSN Money, which means it trades at about 15.8-times the current year estimate. That's still not dirt cheap, but it's more attractive than Hershey. On the bright side, the company has proven staying power; it was founded in 1894! It also has an internationally recognized name, which could help open up new opportunities and land relationships like the one it has with Starbucks (Nasdaq:SBUX).

Bottom Line
Hershey makes a great chocolate bar, but its recent financial results have been terrible. News that a major shareholder won't sell its stock will only hurt the company going forward. I believe there are better opportunities elsewhere.

For related reading, see Mergers Put Money In Shareholders' Pockets.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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