Hershey Looks Sweet

Hershey, once a stale food stock, is starting to look sweet again, Cramer said during Tuesday’s Mad Money.

The past couple of years have seen declining earnings growth, operating margins, ad spending and sales. But lower commodity costs and a new CEO seem ready to kick-start Hershey , possibly giving investors a much-needed refuge in this tough market.

Sugar, cocoa and milk make up 43% of Hershey’s input costs, and those commodities have seen significant declines of late. That trend should continue. But while those costs were high, Hershey had implemented a couple of price increases. And the company isn’t going to relinquish those gains just because input costs are down. That sets up Hershey to beat earnings estimates when it reports its next quarter, most likely sending the stock higher.

Cramer likes the work of CEO David West. West plans to grow advertising by 20% this year – a lack of that spending was a reason for the company’s decline – and he’s already put in motion a major rehaul of Hershey’s global supply chain. Now West is expecting savings of $80 million to $90 million this year, $140 million to $160 million next year and $170 million to $190 million by 2010.

On top of this, Hershey’s got a foothold in China and India and the company’s moved into premium chocolate, a product that accounted for 60% of all chocolate growth in 2007 and should have a compound annual growth rate of 13% from 2008 through 2012.

This company’s a classic case of underpromise overdeliver. Expecting commodity costs to weigh on earnings, Hershey had guided toward the lower end of its previous 2008 guidance in August. So expectations are low. So low that Cramer thinks Hershey could beat the Street consensus estimate of 65 cents per share for quarterly earnings. Again, if that happens, the stock should go higher.

There’s a nice dividend yield of 3.1% here, too. So investors are being paid to wait for the stock to go up. Cramer figured Hershey is actually at $43 stock masquerading at $38. If the company gets a takeover bid – and despite Hershey’s board saying they wouldn’t accept one, Cramer won’t count it out – that price target could be closer to $45.

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