In Focus

Chicks & Chocolate

How can a combination like that be ignored? Especially after the holidays! It's as natural a match as red and green foil-wrapped Kisses at Christmas or Milk Duds at the movies! If I'm going to talk about chocolate, the only brand for me is Hershey's (NYSE: HSY). (Besides, what could be more Chicky than a company named "HER" "SHE" y's!) Even when my brother worked for Nestle, I wouldn't trade in my Hershey's Chocolate Bar with Almonds for a Nestle's Crunch. (I must admit, for my brother's sake, nothing beats a Nestle's Toll House cookie!)

In doing my research, I was amazed to discover that Nestle is actually a distant third to the top two chocolate/candy makers, Hershey's and Mars. In fact, Hershey's only became #1 in the late 80's. You have to consider though, Mars makes M&M's. a tough competitor (and a privately held company). Am I also the only chocoholic on earth that didn't know that Reese's Peanut Butter Cups are a Hershey product? Of course, their product line is far more vast than candy. Any sick Chicks sucking on a Luden's Cough Drop right now? Another Hershey product! Just goes to show how much trivia you learn when you become a "chick." Look out Regis, I'm coming on "Millionaire"!

Owning Hershey stock may not have seemed all that exciting during the whole "internet revolution." However, I think we've learned that for every ying there is a yang and for every dot-com in your portfolio there is a need for a solid blue chip. Okay, the ratio doesn't necessarily have to be one to one, but my point is diversify - both industry and level of risk. If for no other reason, it will help you sleep at night!

Hershey's may not provide screaming growth, but they do have a record of performance. Can you imagine a Valentine's Day without Hershey's Chocolate Kisses? I wouldn't want to! The company began in the late 1800's. I love the story of Milton Hershey, the founding father of Hershey's. He presided over the company and town of Hershey, Pennsylvania, with a mission to provide for its residents and workers. He also founded the Hershey Industrial School for orphan boys. One of those boys went on to become CEO of Hershey Foods, retiring in 1985! I would think ol' Milton would've been pretty proud if he had lived to see that!

In keeping with what seems to be a tradition of "giving back," Hershey has a stated goal of giving back one-third of its annual income from continuing operations in the form of dividends. Basically that's when a company gives a chunk of their income back to their shareholders on a quarterly basis. It sounds like a windfall, but when put in perspective it isn't all that much. This year, Hershey's was a "2 % dividend yield." This means if their stock trades at around $50, the dividend equals $1. The real beauty of dividends is that they can be reinvested and their worth will compound over time.

Hershey's meets several of the Chicks Dozen criterion: we know Hershey's couldn't be simpler to understand, there's definitely repeat purchasing of a low priced product, it's a leader, we love their management. But how about future growth? Good question. The international horizon is pretty murky. Europeans are still turning up their noses at American chocolate. Despite of that, chocolate sales were up 7% for 1999 compared to the average increase of 1 to 3 %. Another interesting trend is the increase in dark chocolate sales thanks to the baby boomers. Apparently, as we age, we desire a richer taste. Be careful next time you reach for a "Special Dark" candy bar, you might be revealing something that you don't want to! 

Also, have you noticed that the candy rack at the check out aisle in your grocery store, really hasn't changed that much over the years? (M&M's, Butterfinger, Hershey Bar, Snickers, Reese's etc)? Believe me, there are tons of new candies just melting to get a place on the rack, but stores often don't want to deal with multiple vendors. For a company like Hershey's, this is terrific news. Increased competition for shelf space means that the bigger companies are the ones that will survive. After all, no candy shelf worth its weight in sugar could possibly exist without Hershey's! As this trend continues, the hope is that Hershey's will actually gain shelf space!

Thus far, my favorite chocolate seems to be a good egg, however, we have yet to look at their numbers. Their Gross Margins are 42%. Net Margins are 9% -- not bad! Their cash to long term debt is 0.5x and their flow ratio is a high 3.0. This last one is the only number that sort of scares me. What's up? Could these last two numbers be attributed to their recent acquisition of Nabisco's breath mint and gum businesses (which includes BreathSavers and BubbleYum!)? There is also a school of thought that maintains that older, established behemoth companies should be able to carry more debt. After all, they're good for it, right?? But a company needs cash to see it through unexpected hard times. Remember, we want to buy companies that will allow us to sleep at night.