Unscrambling Monday's Egg

Unscrambling Hershey Foods Corporation (NYSE: HSY)

Putting Hershey through the Chicks' Dozen
by Chick Kristin

NOTE: All this month in the Chicks' Eye View we will be featuring the richest of the rich from the Forbes List of the World's Richest People. Just who are they and how'd they get to be so filthy rich?

Remember when one million dollars seemed like a lot of money? Don't get me wrong, I wouldn't even turn my nose for the frequent $32,000 Who Wants to be a Millionaire winnings, but I think you know what I mean. With state lotteries, and shows like Survivor, The Weakest Link and Fear Factor, we, as a nation are more accustomed to people earning millions than ever before.

Now, take that one million and multiply it by 9,000 -- that's how much John Franklyn Mars, son of Forrest Mars, Sr. is worth this year -- nine billion dollars. That's 163 times more net worth than he had in 1999, and he's still not as rich as Bill Gates! Just how did he earn that nest egg? Read on.

John Franklyn, now the 65-year-old co-President and Chief Executive Officer (CEO) of Mars Incorporated, inherited the majority of his sweet fortune from his father, who struck it rich with such sugar-coated favorites as Milky Way, Snickers, 3Musketeers and M&Ms. Mars, Sr. expanded the Mars Incorporated product line tempting humans and pets alike with tasty foods including Whiskas, Pedigree and Uncle Ben's rice. Both of his sons expanded Mars across the world, where operations now exist in every continent except Antarctica.

But wait, Chick Kristin, aren't you supposed to be writing about Hershey? "Yes, that's right, Chick Karin. Thanks for the reminder."

Well, Mars Incorporated is not publicly held. In fact, it's as private as its heirs. I searched the Internet high and low and could not find anything about the McLean, Virginia co-president other than how much money he owns. So, in keeping with the Chick Monday Unscrambling article tradition, I figured I would take a stab at Mars' number one competitor, who just happens to be the numero uno candy manufacturer in the United States of America, Hershey Foods Corporation (NYSE: HSY).  

1. Buy What You Know  Warning, if you're on a diet or are a chocoholic, stop reading now. I'm just looking out for your back, I mean best, interests. Kisses, Hugs, Joy -- no, I'm not talking about your love life here -- I'm talking chocolate. You know those perfectly-sized Hershey's Kisses, Hugs and Almond Joy? Or, how about Twizzlers, Jolly Ranchers and Mounds bars? We all know Hershey whether we want to admit it or not.

2. Keep it Simple Sister Whether your children are going trick-or-treating or looking for their Easter baskets, I bet they know Hershey. In fact, they beg for it while you wait in the grocery check-out line, don't they?

3. Industry Mars Incorporated, Nestle and Hershey make up the candy sector of this Food - Sugar & Confectionary industry. Of the over 100 companies in this industry, the three I listed are at the top with Cadbury in sweet company. Now, my English coworkers will tell you that no one makes chocolate better than they do, but my friends, those English Twix taste just as rich as Mars' US version.

4. Leader in its Field According to www.hoovers.com, Hershey is the #1 US candy manufacturer. Its numbers will tell us why, I'm sure of it. But Mars earned a net income of $1,100 million in 2000, while Hershey garnered $334.5 million. Hmm, does it pay to be a publicly-held company?

5. Repeat Profitability I'm sure Chick Megan and I can convince you that a Snickers or a few Hershey Kisses a day will help keep the doctor away. OK, who are we kidding? But I have to admit, I have been known to indulge in a bag of Peanut M&Ms once in awhile. Both Mars and Hershey can turn a profit probably every minute of every day! (Note to reader: I made up that stat,  but it has to be right, don'tcha think?)

6. Gross Margin

Revenue - Cost of Revenue / Revenue

(898.9 - 516.6) / 516.6

382.3 / 516.6 = .74

.74 x 100 = 74%

Sweet margins that meld with the Chicks' desired 50% criterion.

7. Net Margin

Net Income / Revenue

52.4 / 516.6 = .10

.10 x 100 = 10%

Joy! We like at least 8% net margins.

8. Cash vs. Long Term Debt

Cash * / Long Term Debt

21.1 / 877.4 = .02

Whoa, could it be Hershey's cash is melting away? This nowhere near satisfies the Chicks' no-debt goal.

9. Flow Ratio

(Current Assets - Cash*) / (Current Liabilities - Short Term Debt)

(1245.3 - 21.1) / (754.9 - 278.7)

1224.2 / 476.2 = 2.57

*cash, including marketable securities

Normally, I don't see a lot of manufacturing companies with this much short-term debt. This hurts Hershey's chances with the Chicks because we like companies whose Flow Ratio is equal to or less than 1.5.

10. Increasing Growth

(most recent quarter sales - last quarter sales) / last quarter sales 

Sales from Q 7/01 = 898.9

Sales from Q 4/01 = 1080.3

(898.9 - 1080.3) / 1080.3 =

-181.4 / 1080.3 =  -.17

-.17 x 100 = -17%

Foiled again. Perhaps it was the almonds? Or maybe we Americans don't eat as much chocolate in the summer as we do around Easter or the winter holidays?! Yeah, that's it. I'm sure these numbers will boom during the next quarter. After all, Halloween's right around the corner.

11. Strong Management and History   Hershey's current CEO and President, Richard Lenny, came from Kraft Foods. He worked there for 18 years, leading the Nabisco division. William Christ, the Executive Vice President and Chief Operating Officer (COO), has served Hershey for 31 years and running. He received a B.S. in Business Administration from Virginia Polytech and an MBA from Penn State. He's also developed his international skills while attending courses in Switzerland and serving as a Captain in the U.S. Air Force.

Neither of these men inherited their wealth nor business savvy, like John Franklyn Mars, but their curriculum vitae are impressive, at least in this Chick's humble opinion.

12. Buy on Sale
52-week High = $70.15
52-week Low = $41.56
52-week Average = $55.86
Current Stock Price (as of 08/03/01) = $59.70