Wednesday, September 28, 2016

Kissing The Portfolio with Hersheys

I don't think this is a company that needs much mentioning.  Started by Milton S. Hershey over 122 years ago, the company has become one of the worlds premier confection and snack companies. Although technically Hershey as we know it today was formed in 1927. Located in Hershey, PA the company has been churning out sweet treats loved for generations by people all over the world.  Some of it's iconic brands include Hershey's Milk Chocolate, Hershey's Kisses, Almond Joy, Reese's, and Twizzlers. For more history on the company and Milton S. Hershey click here.

There is a lot to like about Hershey in this current environment. For one it is clearly a takeover target. In fact Nestle, Cadbury, and William Wrigley Jr. Co all have tried to purchase the the company before Mondelez's failed bid. Not that I'm buying the shares for that reason, but it's good to know any buyout is likely to come at $125 or higher which from my entry at $94.86 would be a 37% gain.  The solid dividend growth, and brand recognition is coming at a decent price when plenty of other high quality names are trading at even higher premiums.  I really wanted to wait until $90, and maybe I should have, but the stock looked oversold enough to me that I felt comfortable committing funds at this price level.  I didn't want to miss buying by a buck or less to only see the stock head higher(which recently happened to me with DEO).

There are concerns. Consumers are slowly cutting back on sugary foods.  But candy, which is what the company is known for, isn't under the same attack as their big soda counterparts. Candy is still considered a special treat. I highlighted that earlier this month when I first noted I had my eye on  Hershey(HSY). I think the company is aware of this problem, and is likely the catalyst behind it's expansion into China(which isn't going as planned), and it's move into the snack jerky category with it's Krave acquisition.  I do like how the company still gets around 85% of it's sales from North America. That will keep currency effects less of an issue, and I see it as a plus in this environment.

Revenues at the company have been flat the last 3 years. Yet the longer term view shows a much different picture. Since 2005 when revenues were $4.8 billion they have increased 53% over the last 10 years, or on average 4.36%/yr.  Not exactly blockbuster growth, but steady.  Net income has done pretty well too. The exception is 2015 when net income came in at $512 million. Much of the decline is due to non-cash impairment charges related to the goodwill write-down of it's Chinese operations, and cost cutting initiatives. Adding those two items back in would have net income back at $862 million. Still the numbers are the numbers, but I think these impairments are temporary and we should see net income rise back to it's normal path.  For the past 10 years the company has been sporting a profit margin of 9% on average which is really good for a food company.
The dividend growth has also been outstanding. The 5 and 10 year growth rate come in at 10.17% and 8.08% respectively.  based on the 10yr growth rate the company doubles it's dividend every 8 years. Also I like the trajectory of shares outstanding. Since 2005 shares have been reduced from 178 million to 155 million in 2015. The company continues to buyback shares to offset dilution, and then some.  That means each share is getting larger pieces of net income as years pass. The payout ratio is currently really high, but I see it as a transient issue. The 10 year historical payout ratio is 66%. So it's at the high end, and I don't see much growth coming from an increasing payout percentage.

The balance sheet is good, but I wouldn't call it great.  The current ratio is at a low 0.68, and when I back out goodwill and intangibles and divide it buy total liabilities I get 0.98. On the last one I prefer to see a higher number from my companies such as with MasterCard, Cummins, or Boston Beer. Still it's within an acceptable range and the company has a good track record of managing it's balance sheet.

The company has also managed to record an average ROA the last five years of 13.35%. The average ROI for the last 5 years comes in at 19.96%. Both are respectable numbers and what I'd expect from a blue-chip type company.


Overall I'm pleased with adding this pick to the portfolio. Adding Hershey's to the portfolio gives me 29 total picks. Since last October I've added CHD, COST, DEO, EMR, GPN, IBB, MA, PX, SAM, V, UVV, and now HSY. That's 12 total additions in about a year. I'd like no more than 30 stocks in The Long Haul Portfolio, and I feel comfortable with where it's at. Of course we are still on track to lose WWAV at the end of the year so we should start 2016 with 28 picks.

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