Summary
- Brand name chocolate and candy sales usually hold up well during periods of economic recession.
- Hershey's extraordinary profit margins, conservative balance sheet, top-tier brand names, and positive earnings outlook are worth a look.
- An above-average dividend yield with strong growth potential should entice income investors.
- Technical indicators signal an accumulation trend on weakness during 2020.
We all need a pick-me-up with the COVID-19 pandemic, protests on the streets against discrimination, a spike in unemployment, wild stock market swings, and uncertainty about our economic future. Why not add some chocolate to your portfolio? If eating chocolate brightens one’s mood, why not buy America’s largest maker of this mainstay candy and cooking item to cheer up your 2020 investment returns? In the end, candy and chocolate demand is expected to hold up much better during the coronavirus pandemic slowdown than sales at the average S&P 500 company, including those affected by deep cyclical swings.
The Hershey Company (HSY) has the best profit margins and returns on investment in the large capitalization, packaged food industry; is witnessing above-average business growth vs. declining S&P 500 expectations; is priced right for investors; pays a better than typical equity dividend yield; and is experiencing accumulation trends in the common stock. Sounds like a solid mix of ingredients for bullish stock trading to me.
Image Source: Company Website
Brand Name Powerhouse
Hershey is one of the top five most recognized and loved brands in America. Below are rankings of the brand from consumer surveys conducted by Tenet Partners and graphs of its #1 position in the U.S. confectionery market. Hershey’s, Kisses, Reece’s, Kit-Kat, Cadbury, Brookside, Rolo, Payday, Almond Joy & Mounds, and York chocolates are found everywhere confections are sold. Other candy brands include Breath Savers, Ice Breakers, Twizzlers and Jolly Ranchers. In addition, the company has been using cash flow to acquire companies in the healthier snack area of the packaged food market. Skinny Pop Popcorn and Pirate’s Booty Puff snacks are the largest new contributors to operating results.
Image Source: 2019 Company Presentation
Strongest Food Margins/Returns in the S&P 500
Hershey holds the distinction of being the most profitable large-cap food company in the United States. Below is a 10-year graph of the super-high current gross profit margin of 45% on each dollar in sales, net after-tax profit margin of 14%, return on equity of 67%, return on total assets of 20% and cash flow to assets employed of 13.5%.
Compared to peers and competitors in the packaged food category, Hershey scores at or near the top of the list on calculations of gross profit margin, operating margin and net profit margin. A 10-year history of profitability rates on sales is pictured below vs. J. M. Smucker (SJM), Kraft Heinz (KHC), General Mills (GIS), Mondelez (MDLZ), Unilever (UL), Kellogg (K), Conagra (CAG), McCormick (MKC) and Campbell Soup (CPB).
