Mad Men‘s Don Draper killed his career with his pitch to the execs at The Hershey Company (NYSE:HSY) but he got one thing right about the All-American confectioner when he brought it home saying, “Hershey’s is the currency of affection.”
Don initially pitches a golden childhood moment, the reward after doing his chores of a Hershey bar from his hair-tousling and doting father. Hershey execs nod and mutter, ” Hmm… sweet tales of childhood.” Then Don blows it big time in an uncharacteristic truth bender… how he grew up an orphan in a house of ill repute and, ” the only sweet thing in my life,” was the Hershey bar he would earn from “helping out” the girls.
Needless to say, the cringeworthy moment for Don’s partners and the The Hershey Company (NYSE:HSY) execs prompts a stunned Hershey exec to ask, ” Do you want to advertise that?!”
Moments before, he won them over gesturing to the recognizable Hershey brown and silver wrapper saying, “The product itself is one of the most successful billboards of all time.”
How ’bout the stock, Don?
The stock has run big, from the low $30s four years ago to a multiyear high of $91.99 in April. Let’s be as brutally honest as Don and say maybe it has run too far, too fast as a beneficiary of the frantic search for safety among consumer staples.
It trades at a trailing P/E of 28.15 with a forward P/E of 21.45. The PEG is 2.45 with a yield of 1.90%. The five core global brands are Hershey’s, Reese’s, Hershey’s Kisses, Jolly Rancher, and Ice Breakers.
Two initiatives that have helped sweeten EPS lately are an overall company-wide efficiency drive including a new factory building in Hershey PA and smaller portions as an affordable pleasure.
The Hershey Company (NYSE:HSY)’s main competitors are international food giant Nestle, Mondelez International Inc (NASDAQ:MDLZ), privately owned Russell Stover Company, Tootsie Roll Industries, Inc. (NYSE:TR), Yildiz Holding which owns Godiva Chocolate, Rocky Mountain Chocolate Factory, Inc. (NASDAQ:RMCF), and privately held M&M Mars.
Of these rivalries competition between M&M Mars and Hershey’s has been the most fierce with C-suite poaching and ad battles. M&M Mars is famously reticent but it’s no secret they recruited the CIA for intelligence on international candy makers in 1981 producing reports on Soviet and Eastern European confectioners.
Once strategic partners, their race for shelf space is an epic documented in the book, The Emperors of Chocolate. The Hershey Company (NYSE:HSY)’s has limped behind in this race as Mars pioneered the use of weather satellites as well as a fleet of statisticians to gain an edge on commodity costs in cocoa, sugar, and peanuts.
Battling to be the foreign currency of affection
Mondelez International Inc (NASDAQ:MDLZ) spun off Kraft Foods Group Inc (NASDAQ:KRFT) last fall keeping CEO Irene Rosenfeld (who snatched Cadbury’s right out from under Hershey’s nose) and the largest brands: Cadbury’s, Oreo, Lu, Tang, Jacobs, Trident, and Nabisco. Confectionery constitutes 40% of revenues. The company’s net income for 2012 was $35 billion, compared to $6.6 billion for The Hershey Company (NYSE:HSY) and both have an expected five year sales growth rate of 23%.
Mondelez trades at a lower trailing P/E of 18.36 with a forward P/E of 16.57 and a PEG of 1.59. It only offers a yield of 1.80% as it is deemed to be the international grower between it and spinoff Kraft Foods Group Inc (NASDAQ:KRFT), the domestic name with double the yield at 3.70%.
The Hershey Company (NYSE:HSY)’s attempt to buy Cadbury’s was hamstrung by the Hershey Trust, the non-profit foundation that has a controlling interest. Corporate governance risk for Hershey is low except for shareholder rights and shareholders should know how much influence the Trust wields. The trust is responsible for the charitable Milton Hershey school, mentioned in Don’s confession as his dream home instead of the squalid, loveless bordello.
Don points out Hershey’s has a, “relationship with Americans that is so overwhelmingly positive.” The US is where it does its best business.