Don't Kiss Hershey Goodbye

TheStreet.com

NEW YORK (TheStreet) -- As Forrest Gump opined, the unpredictable nature of life is like a box of chocolates; you never know what you're going to get. While that might be true of several companies within the packaged food industry, investors in global chocolate giant Hershey have always gotten strong revenue and dividend growth.

This level of performance has not been lost on the Street. Accordingly, not only has Hershey stock soared as high as 43%, but the company has been rewarded with a decadent P/E of 28, which melts away the industry's average multiple of 7.

In that regard, it's hard for me to develop a "Hershey sweet tooth" here, given my bias as a value investor. Especially when I can taste Nestle at a much cheaper valuation multiple of 20. Not to mention, Nestle slightly outperforms from a margin perspective.

[Read: Apple Will Disrupt and Destroy When It's Ready]

That said, I don't necessarily agree with the recent arguments and talking points that have been raised against Hershey, particularly given the company's international growth expectations. I won't argue against the fact that both Nestle and Mondelez have posted slightly better volumes. That too needs to be considered in the context that they operate from a smaller consumer base.

What's more, despite the rash of mergers and acquisitions activity that has overtaken an industry that is perpetually consolidating, that Hershey still dominates the U.S. in terms of large customers, is encouraging. And contrary to popular opinion, I don't believe the company's 6.1% revenue growth in the recent quarter was fluke.

That Hershey performed so well even though several newcomers have emerged to post above-average market share gains is encouraging. In that regard, I can't say Hershey is losing much ground. The company actually added market share in the U.S. and internationally.

Hershey's overseas growth has come under some scrutiny. But I believe management is making the right moves to address these markets. Appointing former CFO Humberto Alfonso to president of Hershey's International Business was a step in the right direction.

I believe, however, that this management shuffle is going to take some time. And I wouldn't be surprised if it led to more M&A activity down the road that will add more coating to Hershey's international exposure. It certainly helps that the company's core brands are still gaining overseas market share.

Hershey's strong brand presence, along with some recent product launches in the U.S. and internationally, should help narrow the growth/market share gap vs. Nestle. And here's another thing; as impressive as Hershey's 6% revenue growth was, outpacing Kraft (a stock that I like), Hershey's management remained unsatisfied.

[Read: Health Insurance Exchanges: What Are You Really Buying Into?]

Despite the 43% gain Hershey's stock price has realized this year, management continues to look for ways to mix growth with strong margin leverage. And the company believes that as early as the fourth quarter, investors will see better results as confectionery sales should ramp up in the holiday season.

Essentially, Hershey's fourth-quarter earnings might actually be better than this quarter's earnings-per-share of $1.04, which bested consensus estimates by almost 3%. For all of the talk about how "lackluster" this quarter was, it is remarkable to realize that Hershey actually posted a year-over-year earnings improvement of 20%.

So while I do believe that these shares are relatively expensive, Hershey is outperforming expectations that have been consistently high. Getting 20% year-over-year earnings growth does not come cheap. And this is a case where investors are getting the premium value for which they are paying. Not to mention, Hershey "kisses" that confidence with 2% yield.

It comes down to this: I fault the Street for its optimism, given the fact that this management team consistently pushes all of the right buttons. I'm not going to tell you that this stock should appeal to value investors right now. But with longer-term horizons, Hershey can still produce. Assuming international share gains and margin expansion, a share price of $110 to $115 is not out of the question in 2014.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

EXCLUSIVE OFFER: See inside Jim Cramer’s multi-million dollar charitable trust portfolio to see the stocks he thinks could be potentially HUGE winners. Click here to see his holdings for FREE.

View Comments (0)