Stock of the Day
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Hershey (HSY)
Love Not Quite in the Air at Hershey
There are two things that most people think of when it comes to Valentine's Day: flowers and chocolate. Hershey's, which probably had debated getting into the former at some point, knows that it has America's heart when it comes to the latter. The Hershey, PA-based chocolatier has been around for longer than a century, and many investors might think that it's business acumen might be a little dated. The company has struggled over the last five years to turn the chocolate ship around, but things have not progressed smoothly. After having moved past a botched takeover bid and adding 200% to shareprices, things have certainly turned south. It has closed to of its flagship plants and shifted production to Mexico. With shares down 30% over the course of a year, let alone 10% of that coming in 2008, how will Hershey executives bring back that lovin' feeling that it used to share with its investors?
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Shareholders have been feeling an entirely different set of emotions toward Hershey than love. They undoubtedly feel fear that the value of their shares has fallen from a high of $66 in May 2005 to a low of $35 today. They are probably wondering if new CEO David West has the chops to turn things around. Heck, they probably feel a little bit of animosity toward the Milton Hershey School and the state of Pennsylvania for stopping the company from being sold for $11bn from way back in 2002. Whatever it is that they are feeling, love is not one of those emotions - and they have every right to feel miffed. The company had plodded along during the early 1990s but had still showed growth. From 2002 to 2005 the company tacked on monumental gains. It was after summer of 2005 when things turned from sweet to sour.
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Hershey faces a constant problem that many other manufacturers face: commodity prices. Unlike steel mills and bakeries, which can get their raw materials from a host of countries, cacao, the tree that provides the chocolate ingredients cocoa and cocoa butter, is found in only a handful of areas. High demand for the stuff from companies such as Cadbury Schweppes (CSG: Charts, News, Offers), Nestle and other candy companies makes the price of the cacao beans fairly dear, and the location of cacao plantations trend to politically unstable or severely undeveloped areas of the world. All of these factors put the squeeze on profitability, even if Hershey produces an estimated 40% of the stuff. To combat this, Hershey and several other manufacturers and confectioners are lobbying the U.S. Congress and the FDA to relax restrictions on what constitutes chocolate. They want to be able to substitute partially hydrogenated vegetable oils, artificial sweeteners and milk substitutes for cocoa butter, which is one of the more valuable ingredients of chocolate. If they are able to convince the government to relax restrictions they can sell the cocoa butter to manufacturers of other products.
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As with a lot of other manufacturers facing life on the skids, Hershey has closed several facilities in the United States and moved them abroad. The company recently shuttered facilities in both California and Ontario, Canada. The Ontario plant closure was especially telling, since it was the first plant that Hershey opened outside of Hershey, Pennsylvania. The California plant was the largest chocolate manufacturing plant in the world.
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Hershey has a long road ahead of it. Profit fell 65% during its fourth quarter, and the company tacked on a lot of expenses in order to close manufacturing facilities. High growth areas, such as China and India, are still bright spots, but falling commodity prices are probably more of a pipe dream than a reality. What Hershey might have to do, and what it has tried to avoid for years, is raise prices on its products. Higher prices could lead to competitors, such as Mars, Inc., grabbing more market share.
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