The Hershey Company

The Hershey Company (stock ticker: HSY) is one of the world's largest and most iconic chocolate manufacturers, headquartered in Hershey, Pennsylvania—a town literally built on chocolate. For over a century, it has been delighting consumers with beloved brands like Hershey's Milk Chocolate, Reese's Peanut Butter Cups, Hershey's Kisses, and Kit Kat (in the United States). From a value investor's perspective, Hershey is more than just a candy maker; it's a classic Consumer Staples business with enduring brands, predictable demand, and a formidable competitive position. Its unique ownership structure, controlled by the Milton Hershey School Trust, adds a fascinating layer of long-term stability, though it also presents unique governance considerations. This combination of a powerful business model and a distinctive ownership story makes Hershey a perennial case study in long-term value creation.

For a value investor, analyzing Hershey is like unwrapping a classic chocolate bar: you know what to expect, and it's usually high quality. The company's strength lies in its deep and wide Economic Moat, which protects its profits from competitors.

An economic moat is a sustainable competitive advantage. Hershey’s is built on several layers:

• Brand Power: Hershey's greatest asset is its portfolio of legendary brands. Consumers don't just buy a chocolate bar; they specifically seek out a Reese's or Kisses. This powerful brand loyalty translates directly into Pricing Power, allowing the company to pass on cost increases to customers without a significant drop in sales. This is a hallmark of a fantastic business.
• Distribution Dominance: The company has a vast and efficient distribution network that places its products on shelves in everything from hypermarkets to corner gas stations. For a new competitor, replicating this scale and reach is a massive and costly undertaking, creating formidable Barriers to Entry.
• Economies of Scale: As a confectionery giant, Hershey benefits from immense Economies of Scale. It can purchase raw materials like cocoa and sugar in huge volumes at lower costs, run its manufacturing plants at peak efficiency, and afford nationwide advertising campaigns that smaller rivals can only dream of.

You cannot fully understand Hershey without understanding its unique ownership. The company is effectively controlled by the Milton Hershey School Trust, a charitable entity established by founder Milton Hershey to fund a school for underprivileged children.

• The Upside (Long-Term Stability): The trust, as a Controlling Shareholder, provides a powerful defense against short-term market pressures and Hostile Takeover attempts. For example, in 2016, the trust was instrumental in rejecting a takeover bid from competitor Mondelez International. This structure encourages a long-term focus on the health of the business, which often aligns with the goals of a patient value investor.
• The Downside (Potential Conflicts): The trust's primary legal and moral obligation is to fund the school, not to maximize Shareholder Value for all investors. This means the trust's interests as the majority owner may occasionally diverge from those of Minority Shareholders. For example, the trust might refuse a very generous acquisition offer that would benefit public shareholders because it prefers the steady, long-term Dividend stream to fund its operations.

While Hershey is a high-quality company, no investment is without risk. It's crucial to look at both the sweet numbers and the potential sour notes.

Financially, Hershey exhibits many traits of a classic Defensive Stock—a business that tends to perform steadily regardless of the broader economic cycle. After all, people enjoy chocolate in good times and bad.

• Profitability and Returns: The company consistently generates strong and stable Operating Margins. More importantly, its Return on Invested Capital (ROIC) is typically very high, indicating that management is exceptionally good at deploying capital to generate profits—a key metric for quality investors.
• Shareholder Returns: Hershey has a long history of paying a reliable and growing dividend, making it an attractive holding for income-oriented investors.

Even a chocolate giant faces challenges. Investors should keep an eye on the following risks:

• Changing Consumer Tastes: The global trend towards healthier eating and reducing sugar intake is a significant headwind. Hershey is actively trying to mitigate this by acquiring healthier snack brands (like SkinnyPop popcorn) and offering zero-sugar versions of its classics, but the core business remains confectionery.
• Input Costs: The price of key commodities like cocoa, sugar, and dairy can be volatile. Sudden spikes in these costs can squeeze the company's Gross Margins if it cannot immediately pass them on to consumers. The company uses Hedging strategies to smooth out this volatility, but it remains a persistent risk.
• Competition: The candy aisle is a battlefield. Hershey faces intense competition from other global giants like Mars (maker of M&M's and Snickers), Nestlé, and a growing army of private-label brands from large retailers.