Has the chocolate bar turned gray? Investors could have been thinking that, as Hershey Co. (ticker: HSY) seemed to unravel earlier this year.
With talks of a buyout offer floating, the trust that controls 80 percent of the company’s voting shares faced a power change, while the CEO of Hershey announced he would resign next July. From the outside, it appears the chocolate brand has melted.
But while the stock plummeted 9 percent over the past three months, it has rebounded 7 percent in the last 30 days. After a hugely volatile year, HSY stock is outperforming the Standard & Poor’s 500 index, up nearly 9 percent since January.
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Has the chaos finally subdued, allowing this candy stalwart to grow again? Even if it does, it doesn’t make it an automatic buy.
Cutting costs in order to improve profits. Hershey has struggled to find a way to grow revenues much beyond 4 percent for the year. In 2016, it gets a little better, expecting a 4.25 percent revenue growth. Part of the reason it has struggled is due to the trend of consumers focusing on healthy living.
Chocolate doesn’t play “well with health and wellness,” says Edward Jones analyst Jack Russo.
But in October, Hershey caught investors off guard when it released third-quarter earnings, raising its earnings-per-share estimates for the year to a range of $4.28 to $4.32. Part of the reason it did this, though, wasn’t because of improved sales, but because of an effort to cut costs. It’s targeting $100 million in annual savings from 2017 to 2019.
“Annually, the savings represent less than 3 percent of operating income,” writes Christopher Growe, a managing director at investment firm Stifel.
Yet, the cost cutting is what Hershey has to do, since revenues aren’t robustly growing. There is hope that new product offerings will improve sales next year.
The trust controls the company. The Hershey Trust Co. is a $12 billion charity that was set up more than 100 years ago to ensure the funding of the Milton Hershey School. It owns 80 percent of the voting shares of Hershey, even though it accounts for about 30 percent of the total shares. This means that what the trust wants, Hershey must oblige.
“It makes this company difficult from an investment point,” Russo says. “All that will play into how the company is run and managed.”
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But the trust has issues of its own. In July, it came to an agreement with the Pennsylvania attorney general’s office, which has oversight of the trust, to reform its board of directors. The trust agreed to impose 10-year term limits on its directors, which means three of the members will step down by the end of the year, while two others will resign by the end of next year.
In addition to that, four board member seats were already vacant, by the time of the agreement. This leaves nine seats to potentially fill by the end of 2017.
This leadership gap puts Hershey in a difficult situation to make future acquisitions, without clear guidance from its most important shareholder. And now, it’s also on the lookout for its next CEO, as John Bilbrey announced last month he would step down by next summer.
It makes investing in Hershey very uncertain, Russo says, but some people are comfortable with that type of uncertainty.
A low buyout offer highlights Hershey’s plan. Much of this leadership uncertainty unfolded while confectionary and food company Mondelez International ( MDLZ) pursued Hershey. In June, Hershey rejected a $23 billion offer to merge with the company, which would include Mondelez, the maker of Oreos, taking the Hershey name. Part of the issue is that Pennsylvania’s attorney general also has to sign off on any deal, and will listen to concerns from residents of Hershey that may not like the change.
Even with the complexity of closing a deal with Hershey, Mondelez’s offer didn’t force the company to “ever really think too serious about it,” Russo says. He believes it was a low offer, one that Hershey couldn’t take. According to reports, Mondelez indicated to Bilbrey that they would be willing to raise the offer from $107 a share to $115 a share, but Hershey wouldn’t listen to offers below $125 a share.
In August, Mondelez dumped its effort to acquire Hershey. That doesn’t mean another suitor couldn’t come along. But Hershey has shown a desire to stay independent, despite consolidations in the sector. That could leave other suitors thinking, “why waste resources on this,” Russo says.
It’s not overvalued or undervalued. At 22 times 2017 price-earnings, Hershey is near its historic average. It’s also at a “slight premium to its food peers,” writes Growe.
While this doesn’t make the company overpriced — Russo believes that Hershey deserves some premium to its peers due to its name in the sector — it also doesn’t leave much room for growth. And with its leadership stuck in a turnover, trends of consumers eating less candy, and a lack of new ways to increase revenues, it’s hard to get excited about the chocolate.
[See: 7 of the Most Loathed Stocks in the Market.]
If an innovation comes out next year, that could impact the short term. But the stewardship of the company isn’t changing anytime soon.
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The Sweetness May Be Wearing Off From Hershey Co. Stock (HSY) originally appeared on usnews.com
