Cramer's Call on Hershey

Consumers can buy generic for just about every product out there. Cereals, soups, baby food, even non-dairy creamer. And in this recession, you can bet people are doing just that. So companies like Ralcorp and Treehouse Foods, which make these private-label products, should do well during a downturn.

But one thing people seem unwilling to part with is their quality chocolate. Maybe wise entrepreneurs know this, because there’s so little generic competition in the space. Private-label penetration adds up to only low single digits, and overall candy market share reaches just 10%. That’s one of the reasons Cramer likes Hershey. The company’s strong brand makes it the logical choice for Americans looking to drown their sorrows in some serotonin-releasing sugar.

Hershey’s exposure to private labels is only 3% of revenues. In terms of market share, the company controls around 36% in all its respective categories. And Hershey rakes in 94% of its sales from markets in which it’s number one. Mars did manage to elbow in on Hershey’s territory, but keep in mind that’s also branded candy and the trend seems to have slowed considerably through much of 2008.

Cramer thinks there is plenty of opportunity to recapture that lost ground. Advertising spending is down so much that Hershey should be able to launch effective marketing campaigns to beat back Mars’ advance. Ad spending was up 23% in 2008 and the company expects another 20% increase this year.

Another potential positive on the market share front: The Mars-Wrigley merger might be slow to generate the savings and other benefits of integration, giving Hershey a leg up, at least for a time.

The latest quarter showed bullish signs for owning HSY. Hershey beat the Street’s 54 cents a share earnings estimates by 5 cents, sales for core brands grew about 8%, retail and convenience store sales were up, and there was a small gain in market share. Even despite price increase, Hershey managed to boost its overall sales numbers. The price increases will show added benefit now that raw costs are coming down, as even wider margins put more money in Hershey’s coffers. Management offered sales growth guidance of 2% to 3%.

Cramer likes the 4% dividend yield, too. Hershey is expected to generate $3 in cash flow a share this year, so that payout should be safe.

The stock, trading at 15.8 times 2009 earnings, may look expensive, but because HSY is just above its 52-week low Cramer thinks it’s buyable. Besides, stock valuation hasn’t worked all that well in this market. Plus, the mainly negative sentiment by Wall Street analysts – only one buy, but six holds and six sells – means there’s plenty of room for upgrades, if only due to lower commodity costs.

Speculation about a takeover has led to a spate in call-option buying on Hershey, and it predicts this $30 stock will breach $35. Cramer doesn’t know if the takeover will happen, but he did say that a merger with Cadbury would help Hershey diversify overseas. Either way, though, he’s still confident that HSY investors will earn that five spot.

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