The iconic chocolate maker Hershey Co. (NYSE: HSY) looks like a Buffett-style value investment.
To explain, Hershey makes a product that technology cannot make obsolete or irrelevant, namely chocolate. I imagine people will eat chocolate bars and chocolate-chip cookies a century on Mars from now.
Thus, Hershey can make money no matter what happens with technology. Hershey makes money whether you buy your chocolate at the store or order it through Amazon Prime.
Moreover, the US candy market looks bright for the foreseeable future. Grand View Research estimates the US Candy market will be worth $19.6 billion in 2025.
Plus Grand View estimates Chocolate candies dominate the US market. So the future looks bright for Hershey in the 20th Century. Interestingly, Grand View predicts online candy sales could experience “lucrative growth” over the next decade.
How Much Money is Hershey Making?
The Hershey Co. (NYSE: HSY) made a gross profit of $943.32 million on revenues of $2.134 billion last quarter, Stockrow estimates.
Additionally, Hershey reported a revenue growth rate of 2.64% for the quarter ending on 29 September 2019. Meanwhile, the gross profit grew from $874.74 million on 30 June 2019, and the revenues grew from $1.767 billion on the same day.
Furthermore, Hershey reported a quarterly net income of $325.21 million and a quarterly operating income of $460.81 million on 29 September 2019. Those numbers grew from $312.84 million and $410.07 million on 30 June 2019.
Hershey’s generates impressive amounts of cash from its chocolate sales. In particular, Hershey’s reported an operating cash flow of $314.06 million and a free-cash flow of $253.8 million on 29 September 2019. Conversely, those numbers were down from $349.37 million and $265.99 million on 30 June 2019.
In addition, Hersey’s reported a financing cash flow of $115.91 million on 30 September 2019. Thus, Hershey’s makes money from candy.
Yet, Hershey’s does not keep a lot of that money. Hershey’s reported $302.64 million in cash and equivalents on 29 September 2019. That number was down from $395.96 million on 30 June 2019 and $823.79 million on 30 September 2018.
Thus, Hershey’s makes more money but has less cash.
Is Hershey’s Recession Proof?
I think Hershey’s (NYSE: HSY) could be recession proof because it makes a low-cost luxury.
To elaborate, even the poorest people can afford to indulge in a chocolate bar, Reese’s Pieces, or Reese’s peanut butter cup. In fact, chocolate sales could rise when times get bad because candy is the only luxury some people can afford.
Growing wage stagnation and rising income inequality are putting the squeeze on the American middle class. Notably, Career Builder estimates 78% of American workers were living paycheck-to-paycheck in 2017. Frighteningly, that percentage was up from 75% in 2016.
Additionally, Career Builder and the Harris Poll estimate 25% of US workers have trouble making ends meet. Under those circumstances, candy could be the only luxury some people can afford.
Moreover, low-cost mass-market candies like Hershey’s chocolates will be the sweets those struggling with income inequality will reach for. Consequently, Hershey’s sales and profits could increase if recession strikes.
Conversely, Hershey’s can make more money if the economy improves because people will have more money to buy candy.
Is Hershey’s a Buffett-Style Value Investment?
Therefore, Hershey’s has some value-investment characteristics Warren Buffett likes.
For instance, Hershey’s makes a simple-product that is recession proof and resistant to technological change. In addition, Hershey’s makes something that never seems to go out of fashion: chocolates.
Famously, Berkshire Hathaway (NYSE: BRK.B) owns a chocolate maker; See’s Candies. Plus, Berkshire Hathaway (NYSE: BRK.A) owns the McLane Company; which distributes candies and other snacks to convenience stores and other retailers.
However, I think Mr. Market overpriced Hershey’s at $141.32 a share on 7 November 2019. To explain, I do not believe Hershey’s makes enough money to justify that price. Therefore, I cannot consider Hershey’s a value investment, despite its characteristics.
Is The Hershey Company a Good Dividend Stock?
However, I think Hershey (NYSE: HSY) offers a good quarterly dividend for its price. For instance, Hershey plans to pay a 77.3₵ quarterly dividend on 21 November 2019.
Plus, the Hershey dividend grew slightly this year. Hershey paid a 77.2₵ on 23 May 2019 and 77.3₵ on 22 August 2019. Dividend.com reports Hershey’s dividend has been growing for nine years.
In total, Hershey’s shareholders received a dividend yield of 2.20%; an annualized payout of $3.09, and a payout ratio of 53.8% on 1 November 2019. Thus, Hershey’s is a good dividend stock that Mr. Market overprices.
I think the Hershey dividend is very safe because of the candy business’s nature. As I noted above, chocolate sales are not likely to fall because of recession, or income inequality. Conversely, income inequality and recession could boost Hershey’s sales.
Thus Hershey’s has a high margin of safety; but a high stock price, because of the low cash reserves. I think Hershey’s stock price is heading for a fall. Investors need to watch Hershey’s, but not buy it until the share price falls.