Hershey is on a completely different end of the spectrum. It makes chocolate and salty snacks. It's not a complex business model, but that can be good.
It's the brand that makes Hershey special. There are other confectionary companies on the market, but Hershey's name goes back over a century and its brands are routinely among Americans' favorites year-round. Who doesn't love a Hershey bar, Kit Kat, Twizzlers, Heath Bar, Jolly Rancher hard candies, or a Reese's peanut butter cup?
The company's popularity means it gets prime shelf space at points of sale, much like Coca-Cola and PepsiCo do in the beverage industry. Hershey has an estimated 24% of the U.S. confectionary market, an impressive figure considering any company can make chocolate bars. It's the brand that makes the magic.
That translates to financials, too. Hershey is a simple and highly profitable business that earns an impressive 22% return on invested capital. That means that when Hershey pumps a dollar into its business, it gets $1.22 back. This signals that Hershey has pricing power, which is helping the company deal with a surge in cocoa prices that threatens to pressure its profit margins.
While that's bad news for the company, it's creating an opportunity for long-term investors. Shares have fallen to a price-to-earnings ratio of 20, below the company's long-term average.
Over time, it should adapt to the higher cocoa prices, and there's a good chance the shortage will end and prices will normalize again. In other words, use a short-term problem to buy this excellent stock and enjoy the following years of dividends and price appreciation.
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