Description

HSY needs little introduction - the stock was written up a couple times on this board and everybody knows the name.  Like virtually every one of my writeups, I bring few useful unique observations to this idea and thus won't be spending a lot of words to the table to snack on.  But here is why I own this one at present in my personal portfolios:

*stock trades at a 52 week low; 181.47-276.88

*the 10 year treasury has nosedived from 5% just a few weeks ago to 3.92%.  This opens up the dividend paying stalwarts as a potentially attractive investment group, as the dividends become more meaningful.  Indeed, my personal fixed income holdings have gone from interesting (yields at 8% to 10%) to boring almost overnight (sub 6% and approaching 5%), with the only change in the story with that debt being a change in rates; it was fun while it lasted, for now, unless there is another bite at the apple.  But the same dynamic happens with regularity with other groups, esp. those with hair, and consumer goods companies have hair right now.  

*the hair is as everyone knows new miraculous weight loss drugs that are inevitably going to result in doom for many consumer companies, as fears of a loss of appetite have riled many companies such as this one in unison.  Due to my vast and wide ignorance, I will admit I didn't spend that much time on this issue, as I figure the results will eventually anniversary and meanwhile having a group of stocks fall in such a uniform fashion strikes me as an opportunity to get exposure to this area.  Besides, without that news, I doubt HSY is at a 52 week low - this has been a very solid year for them.

*HSY itself is also out of favor due to some very tough compares, cocoa prices going thru the roof, fears of recession, snacking under pressure, and the company moderating the buyback plan in 2023 with CapEx being high this year but set to come down (new ERP system).  All these issues are noteworthy and worth study if you want to develop a "catalyst driven idea" for your hedge fund, but I don't care to play that game and just figure these things normalize at some point or another.  If the stock goes down due to missing a number next quarter or two or three from now, hopefully it will be crushed disproportionately so i can lower my cost basis substantially, but I think now is the time to start investing in these names; like many things I buy, I tend to write them up on VIC a bit early.  Lastly, as an individual investor now, I have the advantage of not being responsible for any single result except my own performance as it meets my expectations or not, and I am most decidedly not a punch-card investor either.  So I can be a nibbler.  This is not the first consumer staple I've bot in the last couple weeks.   

*for a food company, HSY has a pristine balance sheet.  Latest Q had 471m in cash with 820m STD and 409 LT, with gross CFFO TTM at 2.3b.  for a food company, it has exceptional historical sales growth with 11.2b TTM sales, 8971 in 2021, 7986 in 2019, and 7440 in 2016.  Per VL, five year sales growth was 5%.  

*company pays a solid dividend ($4.77), and generates considerable FCF.  Here is a chart for the previous 5 years from 2022:

Trailing cash flow is 2333 with CapEx at 708.  CapEx will peak this year at 800-850m per the last EPS release.

*Valuation - for almost 30 years I've run a simple PE stalwart screen taking a historical 5 year PE range using high and low data and projected forward earnings estimates going out 12 to 18 months or so to identify those out of favor, or those with a theoretical min 20% appreciation potential.  By and large, these have resulted in very satisfactory results while also diversifying my portfolio into names which are a one-stop shop in buying more when they go down as falling prices are always opportunities, not issues.  Now that we are in Dec 2023, I will soon begin to substitute 2025 estimates for 2024.  Extrapolating VL's $9.80 estimate for 2024 (WF is currently higher; I only use these for reference and don't derive them independently; as a stalwart, HSY has always had steady and improving operating margins) and adding 7%, I get about $10.50.  Slap on a median 23x on that, and I get a $242 which I will round up to $250 including dividend payments, or a potential 35-40% gain.  At 20x, the business would be at $220 or so, or a 20% gain.   What multiple is appropriate?  If 10 year rates continue to fall, HSY is worth a lot more than 20x.  This is a great American company selling a wonderful product and some time or another it will be recognized as such, and issues that seem burdensome today will be resolved tomorrow.  It is also likely inevitable that with the current stock price weakness HSY will step up the buyback plan next year.  This was a $277 not that long ago, and like interest rates going up and down and over-correcting the same thing has happened here IMO.  

For more information, there was an investor day earlier this year.  Many analysts have been spending much time trying to parse the words mentioned then to come up with absolutely precise figures needed for 2024, with the minutia absolutely overpowering any view of a future that goes beyond the near horizon.  Indeed, the focus on the latest calls was centered on analysts crying for help with their models, which is also likely resulting in fear and loathing in this stock price.  I just don't care one iota about these things, but will instead take comfort with my Hershey holding by grabbing myself a peanut butter cup.

Catalyst

Change in sentiment