The Hershey Company (NYSE:HSY), a chocolatier in Pennsylvania probably loves Valentine’s Day more than anyone else. For Hershey, increasing demand for its chocolates this time of year is a big part of its business model. Hershey devotes an entire part of its website to Valentine’s Day, where it advertises many different types of special products such as personalized labels and heart-shaped chocolate boxes.
Famous investor Warren Buffett said one of the secret formulas to a successful business is to “buy commodities and sell brands.” That is exactly what Hershey is doing. It purchases sugar, milk, cocoa, etc, and sells products that have major brand recognition. About half of the chocolate consumed in America is milk chocolate, and that is what Hershey is known for. If someone goes into a candy store to buy a Hershey chocolate bar and the store owner says “sorry, we don’t have Hershey, but we have this other generic brand that is 20% cheaper,” then the customer will probably leave and try to find another store to get his Hershey fix. That is the power of brand loyalty. It automatically puts a 20% value premium over other businesses offering the same food. Check out some of the awesome brands Hershey is responsible for.
Hershey’s global reach is surprisingly wide and Forbes has ranked the Hershey brand 5th overall. Hershey is America’s largest chocolate producer with 43% of the U.S. chocolate market. It sells products in over 2 million retail outlets in 50 different countries under 60 brand names and growing. Most of its sales come from the U.S.
One of the metrics I use when analyzing a stock is its earnings growth and sales growth, in other words, the bottom line and revenue trends. So let’s take a look at its financials. Revenue = total sales. Earnings = after tax profit.
| Year | Revenue ( billions) | Earnings Per Share (EPS) |
| 2012 | $6.6 | $5.60 |
| 2013 | $7.1 | $6.98 |
| 2014 | $7.4 | $7.29 |
| 2015 | $7.4 | $4.51 |
| 2016 | $7.4 | $6.48 |
| 2017 | ??? | ??? |
The revenue seems to have stopped expanding, but at least it’s stable. The current EPS of Hershey is about $3.5. The stock is trading at roughly $100 today. If we divide the stock price by the EPS we get the P/E ratio of 28.5 times. The lower this number is the more undervalued the stock is. Let’s see if Valentine’s day can boost up the price of this stock.
Another factor I look at is how many institutional investors have stakes in the investment. For Hershey about 77% of the shares are held by pension funds, sovereign wealth funds, and other large institutions so I’m more confident in holding HSY for a long time.
The final variable I look at is the analyst’s recommendations. According to Thomson Reuters there are 15 stock analysts who have opinions about HSY. Most of them give Hershey a “hold” rating, but there are a few positive sentiments as well. Ideally I would have liked to see more optimism from analysts on HSY. At the moment it appears Wall St. doesn’t see a lot of future growth with HSY, but at least there is no “sell” recommendation. Other than this neutral outlook, I still believe Hershey is a good stock to buy and hold because of the other positive signals I’ve mentioned.
Hershey also has a large charity network. Its founder, “Milton Hershey, created the Milton Hershey School in 1909 and since then the company has focused on giving underserved children the skills and support they need to be successful. Today, the company continues this social purpose through ‘Nourishing Minds,’ a global initiative that provides basic nutrition to help children learn and grow. From neighborhoods across the United States to the streets of Shanghai and Mumbai and villages of West Africa, our goal is to nourish one million minds by 2020.”
This author owns 20 shares of HSY as of writing this post.