Magazine

Beware The Sugar High From Hershey


On Tuesday, Apr. 19, at 2 p.m. in Hershey, Pa., shareholders of Hershey Foods (HSY) will gather for their annual meeting in an arena often used for hockey. Before them will be votes on directors, an auditor, and, most enigmatically, a change in name. Hershey is dropping "Foods" to become simply Hershey Co.

True, Hershey no longer sells pasta, but along with its familiar candy it's still very much in the cookie, nut, and snack-food business. So why bother with a new name? "We feel that this is how our customers and consumers best know us," a spokeswoman told me. "It embodies the heritage of the company." Does that strike you as the full story? Me neither. The new name's open-ended nature, plus a companion measure before shareholders to authorize a doubling of Hershey's common stock, has investors also wondering if there is more ahead. A big acquisition, maybe of laggardly Tootsie Roll Industries (TR) or of Hershey's licensing partner Cadbury Schweppes (CSG)? Or perhaps it's maneuvering to fend off a takeover, possibly by rival Wm. Wrigley Jr. (WWY), which courted Hershey back in 2002? In any case, investors are excited: Above $62, Hershey shares so far this year have jumped 13% and now trade near record levels.

Yet whatever buyers of the stock are imagining about Hershey, chances are they will be disappointed. The stock is full of risk, with two of three outcomes likely to hurt it:

-- Hershey is taken over. This is the winner for someone in the stock today. Were an acquirer to come calling, the stock in all likelihood would jump even beyond its current highs. The chances of this, however, strike me as slim. In 2002, Hershey's controlling shareholder, a trust for the Milton Hershey School for needy kids, explored a sale of the company. It retreated after widespread alarm among Pennsylvanians and their elected representatives. Little on that score has changed. According to Hershey's just-issued proxy statement, the trust "intends to retain voting control." For its part, Hershey insists it's not for sale.

-- Hershey makes its own big acquisition. This possibility is far more plausible and even seems likely in this season of renewed megamergers (think Procter & Gamble (PG)-Gillette). Hershey says it's not now in any negotiations that would lead to an acquisition in which it might issue the new shares it hopes stockholders will vote to authorize. It wants to have the shares available, a spokeswoman told me, just to "preserve the company's flexibility" in case an attractive deal turns up. (Another use of the shares would be a stock split, but Hershey split its shares 2-for-1 just last June.) Why would an acquisition hurt investors? It wouldn't, necessarily. Yet stocks of acquirers rarely go up in the near term. This is particularly true of those paying for a deal in stock, a plain signal that management values its stock less than greenbacks.

-- Hershey plows ahead. With much success under Richard Lenny, now starting his fifth year as chief executive, staying the course would be hard to argue with. Lenny has made some small purchases -- the latest, a $128 million deal for Mauna Loa Macadamia Nut -- but mostly has focused on widening margins, extending product lines (Hershey's Kisses got mixed with caramel last year and, this fall, they will add peanut butter), and introducing new ones such as the Take 5 candy bar. The only trouble is the price investors have to pay for reasonable expectations of future profits. You can see this by comparing Hershey with Wrigley or PepsiCo (PEP), two companies whose snacks compete side-by-side with Hershey. A share in Hershey today comes at a comparable or higher multiple of future earnings, yet those earnings are growing more slowly. Nor is Hershey's dividend yield as high.

From Almond Joy to Zagnut, Hershey hardly sells a product that doesn't appeal to my mouth full of sweet teeth. As for the stock, I'm abstaining.

By Robert Barker


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