Summary
- As more investors fear a reversal of the huge market gains since mid-March, they should look to get defensive with their portfolio.
- The firm is leveraging strong cash flows to invest in future growth opportunities and the stock is currently priced as if profits will permanently decline by 20%.
- Despite rebounding from its March lows, at $149/share, HSY trades below its economic book value, or no-growth value, for the first time since 2015.
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As more investors fear a reversal of the huge market gains since mid-March, they should look to get defensive with their portfolio. This consumer goods firm holds industry-leading market share and is seeing increased demand amid the COVID-19 pandemic. The firm is leveraging strong cash flows to invest in future growth opportunities. Best of all, the stock is currently priced as if profits will permanently decline by 20%.
Investors overlooking The Hershey Company (HSY) are in the Danger Zone. Despite rebounding from its March lows, there’s still value in this Long Idea.
Snack Foods Get a Pandemic Boost
While the COVID-19 pandemic has caused some industries, such as airlines and cruise ships, to see demand evaporate in the short term, Hershey is in a unique position to benefit as consumers eat more snacks, candies, and chocolates to find comfort and compensate for not going out as often.
In 2Q20, The Hershey Company’s retail takeaway (which measures how often consumers purchase the firm’s products relative to a specific market) rose 4% year-over-year (YoY) and rose almost 9% YoY in June alone. While overall volume was down in the quarter, due to international and world travel retail weakness, sales were only down 3.4% YoY in 2Q20. The firm’s ability to withstand the economic downturn provides a level of safety that's hard to find elsewhere.
Superior Distribution Platform Delivers Steady Cash Flows and Superior Market Share
Based on data from Information Resources Inc., The Hershey Company owns six of the top 10 confectionery brands, as measured by retail sales in 2018, including Reese’s, Hershey’s, KitKat, Ice Breakers, Hershey Kisses, and Hershey Assortments. The Hershey Company leverages these brands, along with its distribution, product placement, and marketing to maintain a leading market share in each of its target markets, per Figure 1.
In 2019, The Hershey Company is the leading U.S. chocolate firm, with more than 44% of the U.S. confection market. Privately-owned Mars (M&M, Snickers, and more) is second, with ~30% of the market. Similarly, Hershey holds the number one position in the Mint category, with nearly 37% of the market and ranks number 3 in both gum and non-chocolate (which includes brands such as Twizzlers and Jolly Rancher) with 11% and 8% of those markets.
