Investors who are worried about the U.S. economy might be attracted to large-cap stocks which experience a low statistical correlation with the S&P 500, and The Hershey Company (NYSE:HSY) fits that bill to a T. The stock’s beta is 0, and 0.0 when rounded to one decimal place. Even a downturn in the U.S. economy shouldn’t affect its stock price, due to the mass market positioning of Hershey products- the company rises and falls on its merits alone.
In the second quarter of Hershey’s fiscal year, as U.S. retail sales fell and observers worried about low growth, the company increased its revenue by 7% compared to the second quarter of 2011. Costs- particularly SGA expenses, with the company specifically naming marketing and advertising costs- also rose, but The Hershey Company still increased its earnings by 4%. For the first half of 2012, Hershey has done even better with 9% revenue growth and 15% earnings growth. Much of this revenue growth has been driven by higher pricing, as last year Hershey increased its wholesale prices. Lower volumes, as well as the rising dollar in the case of international markets, have prevented revenue growth from being even higher. Current-year EPS are internally projected to be in the range of $2.88 to $2.98 per share.
At the midpoint of $2.93 per share, Hershey’s current stock price of $72.78 serves as a P/E of 25, matching the company’s trailing earnings multiple. The forward P/E, based on analyst estimates, is 20. This sounds high to us: revenue growth is being driven by high-single digit price increases, which we don’t think is sustainable on an annual basis or even every 2-3 years. The dividend yield of 2.1% makes the stock look more attractive, but we still think that even a P/E of 20 is a bit high (and the forward multiple depends on an estimated $3.56 in earnings per share next year- 22% growth compared to internal 2012 forecasts). Perhaps if an investor is looking first and foremost for capital preservation this is a good investment, but we don’t like it on a value basis.
The top hedge fund investor in Hershey in the second quarter of 2012 was Renaissance Technologies, managed by Jim Simons. Renaissance reported a position of 1.7 million shares in its 13F filing, which was a small decrease from the previous quarter but still a position of over $100 million at today’s prices (see more stock picks from Renaissance Technologies). Ken Griffin’s Citadel Investment Group also had a moderate position in the stock, at about 760,000 shares as of the end of June (find more of billionaire Ken Griffin’s favorite stocks). Louis Navellier’s Navellier & Associates also initiated a position of about 530,000 shares during the second quarter.
The Hershey Company is best compared with other confectioners. As far as low-end candy products, Tootsie Roll Industries (NYSE:TR) is probably the closest peer. Wall Street doesn’t cover the stock very closely due to the $1.5 billion market capitalization (Hershey is over 10 times the size), so there aren’t any forward estimates here. On a trailing basis the P/E multiple is 33, considerably higher than the larger company; Tootsie Roll Industries did report good earnings growth in its last quarter, but we still think it is a worse buy than Hershey. Cosan (NYSE:CZZ) is a sugar-focused company which also manufactures sugar foods. It is priced for high growth with a trailing P/E of 44 and a forward P/E of only 10. However, Cosan reported a five cent per share loss last quarter compared to analyst expectations of a 22 cent gain, and missed earnings two of the previous three quarters as well, so we would hesitate to invest here as well. Hershey isn’t really a good value, but it seems to have little market exposure and may be better priced than its peers.