• Brett Schafer

Not So Deep Dive: The Hershey Company



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Show Notes



(Ryan) What they do: “We are the largest producer of quality chocolate in North America, a leading snack maker in the United States, and a global leader in chocolate and nonchocolate confectionery.” (Confectionery: The art of making food items rich in sugar and carbohydrates).


Hershey breaks its business into 3 reporting segments which combined account for more than 100 different brand names. (1) North America Confectionery: Hershey’s, Reese’s, Kisses, KitKats, Jolly Rancher, Almond Joy, Heath, Twizzlers, and more. (2) North America Salty Snacks: SkinnyPop, Pirate’s Booty, Dot’s Homestyle Pretzels, and some others I did not recognize. (3) International: Which consists of some of the same brands as above but also some regional which I did not recognize.


As for customers, Hershey primarily sells its products to wholesale distributors, chain grocery stores, mass merchandisers, vending companies, and really anywhere you can imagine. There is one company that accounts for 30% of sales and that is McLane Company (one of the largest wholesalers in the US).


When it comes to raw materials, the most significant cost for Hershey is cocoa products. These include cocoa liquor, cocoa butter, and cocoa powder, which Hershey buys from 3rd party suppliers who use cocoa beans to make those products. Hershey also has a trading company in Switzerland which is meant to optimize the supply chain and control price risk (so commodity hedging on cocoa).


(Ryan) History: This was a fun one. The Hershey Company traces its roots back to Milton S. Hershey in the 1890’s. In 1893, Hershey attended the World’s Columbian Exposition where he got to see German-made chocolate processing machinery for the first time. That inspired him to get into the confectionery business. And a year later he launched the Lancaster Caramel Company in Lancaster, Pennsylvania. At the time the Hershey chocolate company was a subsidiary that sold various sweets. And in 1900, he sold the LCC to a competitor in order to focus exclusively on chocolate. That same year, they began selling milk chocolate bars. That became such a success that they opened a new factory in Derry Township, Pennsylvania which would eventually become the world’s largest chocolate manufacturing plant and it employed so many people that the community around it adopted the name Hershey.


In 1907, Hershey introduced the chocolate kiss, with its signature plume and aluminum foil wrapping (each one wrapped by hand until 1921). The company went public on the NYSE in 1927 (poor timing), but actually continued to sell well throughout the depression including eventually aiding in the war effort by providing food for troops. Since then, its been a series of new products and acquisitions, (a few to name: 1963, acquired the Reese Candy Company in a stock for stock merger. 1975, launched the york patty. 1977, acquired Twizzlers. And last one I’ll mention, LEAF in 1996, owned a portfolio of 40 different brands). Though I couldn’t find any data dating back to 1927, Hershey has annualized >15% returns over last 35 years.


(Brett) Industry/Landscape/Competition:

  • Industry: Confectionary market estimated at $235.5 billion and expected to grow at 2.4% through 2030

  • Snack foods as a whole estimated to be around $500 billion a year and is supposed to hit around $750 billion by 2026 (this encompasses the majority of Hershey’s products)

  • Competitors: Pepsico, Mars, Mondelez, Nestle, tons of niche players. Hershey is a big player in the industry, especially in the U.S, but doesn’t have outsized market share at all.

  • Estimated to be the 5th largest candy company in the world


(Ian) Management and Ownership:

  • The Milton Hershey School Trust owns 29% of shares outstanding

  • About 80% of voting control

  • Have been selling some to “diversify trust assets”

  • Michele Buck is the CEO and has been since 2017

  • She’s been at Hershey since 2005

  • Blackrock and Vanguard 6%+ ownership


(Brett) Valuation:

  • Market cap of $43.5 billion, ticker HSY

  • EV of $48.1 billion because of low amount of cash and decent amount of debt

  • EV/OI of 21.8

  • EV/FCF of 30

  • 2.5 million dilutive securities outstanding vs. 206 total shares outstanding

  • Dividend yield 1.7%


(Ryan) Earnings:

  • Q1 Revenue: ~$2.7B, up 16.1% (some of that was from an acquisition which I’ll talk about in a sec)

  • 83% of the revenue comes from the North America Confectionery business

  • Organic, Constant Currency revenue was still up 11.5% YoY

  • Want to highlight the growth in Salty Snacks: SkinnyPop up 13.4%, Pirate’s Booty up 55.4%, and Dots products grew by 103% (helped by Hershey’s distribution)

  • They reported an operating profit margin of 27% for the Q. That’s growing quickly as well.

  • Margin expansion over the last 5 or so years has been subtle but gradual.

  • Shares outstanding has been declining slightly as well. Not enough to note though.


(Ian) Balance sheet and liquidity:

  • $338mm in cash

  • About $3B in net PPE

  • About $4B in long-term debt

  • Spread out with different notes until 2050

  • Almost all of it is between 2 and 4% interest

  • Helpful ratio is EBITDA / Interest Expense (20.5x)

  • In good position


Anecdotal Evidence: Different Question: Favorite Hershey’s brand?

  • (Ryan)

  • (Brett) Not much to say. Good products with incredible consistency.

  • (Ian) York


Future growth opportunities:

  • (Ryan) Dots acquisition. On December 14th, of last year, Hershey completed its acquisition of Dots Pretzels for $1.2B (or $1B net of expected future tax benefits). Dots has 55% share of the pretzel category, and as I mentioned earlier, they’ve been integrating Dots into Hershey’s distribution network which has helped drastically ramp sales (103% YoY sales growth). Has taken some margin out of the business in the process right now though. All in all, I think there’s going to be plenty of Salty Snack acquisitions like this Hershey’s future.

  • (Brett) Inflation. This is a perfect business to operate in an inflationary environment. Fairly low capital requirements, durable brands, and small purchase prices make it very economical to raise prices without getting complaints from customers. You can’t pinpoint the exact price of a hershey bar compared to what you would know for a price of gas.

  • (Ian) Healthy snacks. They have done some sugar free versions of their products. Does not seem to be meaningful part of the business. Crossover, not healthy, but not junk Skinny Pop and some other salty snacks.


Highlights and lowlights:

  • (Ryan) Highlights: 100+ years of durable growth. Diverse portfolio. Plays into the Lindy Effect. There’s no way this business ceases to exist in 20 years. Lowlights: Cop-out but the size of the confectionery business. Hard to develop anything that absolutely moves the needle there, especially in North America.

  • (Brett) Highlights: Incredible durability, good roll-up strategy, immune to almost all macroeconomic pressures, lots of runway to buy up snack food stuff like Pirates Booty and SmartPop Lowlights: Minimal international success, impacted by Cocoa prices, Family Trust

  • (Ian) Highlights: Well-established supply chains and distribution works (large moat) Lowlight: Health uncertainty / regulation, low-growth


Bull case:

  • (Ryan) They find better success in their salty snacks and international categories. I think there’s room for more acquisition like Dots, which once combined with Hershey’s supply chain/marketing expertise could be significant revenue drivers.

  • (Brett) Durability. Slowly raising prices. Consistently buy out new product companies. If we don’t see multiple contraction this could lead to 10%+ annualized total returns.

  • (Ian) Acquisitions/salty snacks bump growth to 5-10%. Improve margins by a few basis points. Get your dividend plus a slightly above market return with a fairly stable


Bear case:

  • (Ryan) There are better places to put capital. Hard to foresee total revenue growth/FCF per share growth drastically exceeding 10%. Combine that with a little multiple compression, and you might be getting sub market performance.

  • (Brett) Multiple compression. Hard to find anything else it is that high quality of a business.

  • (Ian) You get your dividend. Growth is miniscule or non-existent. Money sits for years without meaningful returns since you are buying at today’s price



Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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