Hershey Foods (HSY)

Mars, the makers of M&M's, has announced a deal to buy the Wrigley chewing gum company for $23 billion. The merger will create a candy-making giant and that could pose a serious threat to HSY's market share.

Rising prices for commodities are taking a bite out of Hershey's margins. Hershey's has tried to pass these costs onto customers; in January the company raised wholesale prices 13% for half of its domestic candy line to offset rising costs for ingredient, fuel, utilities and transportation. Despite these efforts, earnings fell 32% in the latest quarter while gross margins drop from 35.9% to 32.4%.^[1]

Regardless of the ultimate impact on results, the price increase could distort results during the current quarter. During the four-week period ending February 24, 2008, existing customers may, based on their historic order patterns, order and take delivery of up to eight weeks of inventory at current prices. Given that the consensus estimates expect the first quarter to show the worst performance compared to last year, inventory builds could result in a one-time positive surprise that should be ignored.[1]

Hershey's has lower margins than its competitors. Aggressiveness from Mars and Néstle could make things difficult for the company since Hershey's needs to maintain high production levels to remain profitable.

Hershey’s expects a sales increase of 3-4% this year, but for diluted EPS from operations to decline from the $2.08 reported in 2007 to the $1.85-$1.90 range. And that excludes the impact of an estimated $0.37-$0.40 in restructuring charges. Since Hershey’s has reported such charges in seven of the last eight years, treating them as non-recurring stretches both my credulity and my patience.

Hershey’s (HSY) stock has been anything but sweet for investors in recent times. The shares are off more than a third from the 52-week high and trade barely above half their value from the 2005 peak. From higher costs to increased competition, from product recalls to production disruption, you name the problem and Hershey’s has probably seen it. Throw in the Hershey Foundation’s voting control (and ability to block the company’s sale or merger) and it is no wonder investors seem bitter.

Hershey Foundation’s voting control (and ability to block the company’s sale or merger[1])

90 percent of Hershey's revenues come from the North American market. Overall growth in this market is slow and Hershey's will face stiff competition as it tries to enter Asia.