Hershey (NYSE: HSY) reported superb fourth-quarter and full year-earnings on February 2nd. It seems like a smooth, sweet victory in a relatively tough year, but it was overshadowed by concerns for the candy maker's place in the industry, given Kraft Foods' (NYSE:KFT) January takeover of Cadbury PLC (NYSE:CBY). (Learn more about takeovers in The Basics Of Mergers And Acquisitions and The Wacky World of M&As.)
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Sweet Numbers, Sour Concerns
Hershey earned $126.8 million, or 55 cents per share, compared with $82.2 million, or 36 cents per share in last year's same quarter. Revenue was up 2% to $1.41 billion. Hershey was able to raise prices to offset some cost increases, helping drive profits. For the year, revenue increased from $5.13 billion to $5.3 billion while EPS soared from $1.36 to $1.90.
With the Kraft-Cadbury $19.5 billion deal nearly completed, a larger, potentially stronger Kraft looms as a competitor. Hershey said it will consider looking for acquisitions in the future. Many observers believe it will have to if it wants to keep pace with the competition. Hershey ultimately didn't bid on Cadbury, a decision which it defended. Despite Cadbury's and Hershey's history of working together as distribution partners, Hershey was unable to pull together financing to make an offer. The maker of Reese's Peanut Butter Cups and Hershey's Kisses still insisted on its strong growth prospects as a stand-alone entity.
Other candy makers face varying prospects. Iconic Tootsie Roll (NYSE:TR) was cited for its decades of fabulous total return given the combination of its reliable dividend and historic, steady growth. This is a great company that's hardly even mentioned, with all the Kraft-Cadbury news. Kraft, considered a "mega cap", still has an attractive dividend yield, currently 4.2%, and should resume earnings growth when it assimilates Cadbury. Smaller companies such as Rocky Mountain Chocolate Factory (Nasdaq:RMCF), which just reported negative earnings, will have a harder go.
Scale is an increasingly important factor in the candy business, which brings us back to Hershey. The overarching issue of sugar prices, which are expected to rise, is always an issue in the industry. Investors watching the business of suppliers such as Brazilian giant Cosan (NYSE:CZZ) can get a cue on sugar supply issues. What's less convincing is the prospect that concerns about sugar's affect on health will dampen demand for candy. (Learn more about investing in sugar in Sugar: A Sweet Deal For Investors.)
Near Term for Hershey
Hershey's has Kisses, but Kraft and Cadbury have a whole wedding. No doubt Hershey can survive on its own. Thriving and growing is another thing. The new Kraft-Cadbury conglomeration will be the new No.1 candy maker in the world, and Hershey still faces stiff competition from privately held Mars. Right now, revenue increases are hard to come by and competition is tight, especially in the US market for domestic candymakers.
Hershey will have to stay focused on operations while it keeps an eye out for potential acquisitions. Even as the economy recovers, Hershey could face slow times. Keep an eye on the company, but don't buy in until it clearly shows it can navigate in the new world of larger consolidated candymakers. Watch of course for any acquisition moves, but particularly watch Hershey's top line for revenue increases before buying the stock.
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