Chit Chat Stocks - The Hershey Company (HSY) | Not So Deep Dive

Episode Date: May 31, 2022

The Hershey Company owns and operates subsidiaries that manufacture and sell confectionery products and pantry items. The company operates through three segments: North America Confectionery, North America Salty Snacks, and International. Listen closely as Ian, Brett, and Ryan go through the history, financials, and future prospects of Hershey. Enjoy the show! This episode is sponsored by Stream by AlphaSense, the highest quality expert network library. Sign-up here: https://streamrg.co/CCM Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7investing with the code "Money" and get $100 off: https://7investing.com/subscribe/aff/4/ Interested in more of Ian's work? Follow him on Twitter: https://twitter.com/IanGrayLive  Contact us: [e-mail] Timestamps Company Background | (3:20) Industry | (9:43) Management & Ownership | (11:56) Valuation | (15:02) Earnings | (16:40) Balance Sheet | (19:41) Our Analysis | (22:37) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not-So-Deep-Dive episode on Chit Chat Money. This is the show where we go over the basics of an individual stock in 30 to 45 minutes. If you don't know

a company, this is the show to get started on your research process. And if you know it well, you probably do not want to listen because we're not going to add anything meaningful. with that disclosure or intro. We have Ian joining us today. Ian, this might potentially be your last not so deep dive as you graduate to your investment banking. We're covering Hershey. I think, oh, this is, no, this is your choice, right? Although I influenced you a bit. So why the choice besides me telling you? I've always liked a lot of Hershey snacks. I thought It would be an interesting business to look at now. You got some, you know, got inflation.

We've got some kind of lots of macro stuff going on that I thought might be kind of interesting to talk about with Hershey as well. But mostly, I just like their chocolates. So all right. Yep. And we're going to get into that. Ryan will introduce all the company. They own Hershey, but a lot of other brands as well.

But first, we have to talk about our sponsor today. And that is Stream by AlphaSense. This episode is brought to you by Stream by AlphaSense, an expert interview transcript library that can be integral to a research process for a professional investor. They cover all sorts of industries like telecom, consumers, industrials, real estate, basically everything out there. I'm sure they have stuff on biotech and all that stuff as well. And the way I would describe it is, because if you're within that world, you kind of know how it goes, an expert of a certain industry, say they know digital advertising

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That's again, streamrg.co.ccm. If you're interested, the link is going to be in the show notes. All right, Ryan, introduce the Hershey Company. Yeah, the Hershey Company, one liner on their 10K says, we are the largest producer of quality chocolate in North America, a leading snack maker in the United States, and a global leader in chocolate and non-chocolate confectionery. I had to look up what confectionery meant,

but it is, according to Wikipedia, the art of making food items that are rich in sugar and carbohydrates. So I think, listeners, that sounds about right, I'm guessing. Hershey breaks its business into three reporting segments. And combined, each of the segments accounts in total for 100 different brand names. So there's a lot of different brands under Hershey's umbrella. But the three different segments are North America confectionery. So that includes brands like Hershey's, Reese's, Kisses, Kit Kats, Jolly Rancher, Almond Joy, Heath, Twizzlers. There's plenty more as well. And then there's North America Salty Snacks. That's the second segment. That includes Skinny Pop, Pirate's Booty, Dots, Homestyle Pretzels, and some others that I

didn't recognize, but that's one that they are starting to invest more money into. They're trying to build out that segment to be not just confectionary, but also salty snacks. And then the third segment is international. So that consists of these international operations of a lot of the same brands, as well as some regional ones to other countries that I didn't really know. So they've got different popular brands in Mexico. There's one in Brazil. I think there's one in India too, but I'm not familiar with those, so I didn't name them by name. And then as for the customers, Hershey primarily sells its products to wholesale distributors, chain grocery stores, mass merchandisers, vending companies, pretty much anywhere you can imagine they're trying to get their products in the door. And there is one company that accounts for 30% of sales. That is the McLean Company, but that is just one of the largest wholesalers in the US. So it's not going to any one store, but it's sort of a middleman in that sense. And then when it comes to raw materials, the most significant cost for Hershey is cocoa products. These include cocoa liquor or liqueur, cocoa butter, and cocoa powder. They buy these all from a third party, so they don't actually take the cocoa beans and turn them into the cocoa powder, cocoa butter. That's the third party, but they buy the products afterwards from the third party.

And then they also have a trading company based in Switzerland that is meant to optimize the supply chain and control price risk. So basically, it's a trading firm that does commodity hedging so that if COCO prices shot up and Hershey's input costs were to rise, they would get gains off the hedges or financing gains, essentially. And then the history, this one was fun to look at, actually. I was excited to look through the history. The Hershey Company traces its roots back to Milton S. Hershey in the 1890s. He worked at sort of a mentor's candy shop in the 1870s, but he didn't really get started with the Hershey Company until the 1890s. So, in 1893, Hershey attended the World's Columbian Exposition, where he got to see German-made chocolate processing machinery for the first time. That inspired him to get into the confectionery business. And a year later, he launched the Lancaster Caramel Company. Do you guys say caramel or caramel? I don't know. I don't really know. I'm going to go with caramel. So he launched that business, and the Hershey Chocolate Company was a subsidiary that sold various sweets. At the time, it wasn't until 1900, so seven years later, that he sold the Lancaster Caramel Company to a competitor to focus exclusively on chocolate. That same year, they began selling milk chocolate bars. That's sort of their signature that they still have to today. And that became such a success that they opened a new factory in Derry Township, Pennsylvania, which would eventually become the world's largest chocolate manufacturing plant. And it employed so many people in the community that they renamed the community Hershey. So that's the Hershey, Pennsylvania that you know today was not always Hershey. It's dedicated to the manufacturing plant.

some more history. In 1907, Hershey introduced the chocolate kiss with its signature plume and aluminum foil wrapping. Actually, the plume wasn't introduced until 1921. They were hand wrapping each Hershey's kiss until 1921 when they developed the machinery to do it. The company went public on the New York Stock Exchange in 1927. Yeah, very poor timing on that front because anyone that knows their financial history, about three years later, they were heading into the Great Depression, but they actually continue to sell relatively well from what I can grasp throughout the Depression, which I think is a testament to how durable a business like this is, how addictive the chocolate can be.

And they were actually, they aided in the war effort as well. They were selling, it wasn't necessarily like chocolate to the troops, but they were giving like, the government used Hershey to develop some foods for the troops at the time. And then since then, it's been a series of new products and acquisitions, a few to name. 1963, they acquired the Reese Candy Company in a stock-for-stock merger. 1975, they launched the York Patty. 1977, they acquired Twizzlers. And the last one I'll mention, they acquired Leaf in 1996.

That owned 40 different brands, including Jolly Rancher, Payday, Heath, some others. So that one was a huge boost to their product portfolio. And I couldn't find any data dating back to 1927 when they first went public. But Hershey, over the last 35 years, has annualized more than 15% returns on its stock. So this has been a really good performing stock and business and sort of just like an iconic American company. For sure. That's a great overview.

And yes, the stock price performance has been phenomenal. I think that's one of the reasons why I was interested in looking at the company to identify why their performance has been so good. But I'll hit into industry and competition. The industry is the confectionery market. Well, that's part of it. That's estimated to be at $235.5 billion right now and expected to grow at about 2.4% through 2030. So low growth, but the trend has been, I think it's really over since kind of manufactured food came into play about 100 years ago, it's really been that trend of steady, steady growth more. And this isn't a say on whether you believe that's good or bad. It's just kind of what it is. There's just been steady

growth in these types of products. Snack foods as a whole is estimated to be around $500 billion a year. And that is supposed to hit around $750 billion in 2026. Although again, these research reports take them with a grain of salt no pun intended um but that really encompasses all of the hershey products including the snack foods uh like ryan mentioned the pretzels and i'm forgetting the other one pirates booty and smart pop and that's kind of what they're they're trying to acquire a lot of companies in that space and they have over the last few years big competitors include pepsico um and pepsi is not just pepsi they own uh frito-lay as well and there's mars Candy, Mondelez, Nestle. Nestle is probably the biggest one internationally. Tons of niche players.

Ryan, do you have something? Yeah. There's some interesting history between Mars and Hershey. At one point, I think it may be different now, but Hershey was partners with Mars in developing the M&Ms. So they used the Hershey chocolate for the M&Ms, but then Mars. So M&M was Murray and Mars. They were two different people. And Mars, those were the last names. Mars acquired Murray's stake, and now they've become sort of the head-to-head competitors in the confectionery business. So they had just a little bit of history there. Yeah. And just to note, in the U.S., they have a pretty outsized market share, but internationally, it's a lot smaller. And I'm sure Ryan will get into that in the earnings, and we'll discuss that later. They're estimated to be

the fifth largest candy company in the world. So again, large, but not that large. Ian, do you want to hit management and ownership? We had an interesting one here with the long lasting family trust. Yep. So that's going to be the important thing here. And there's always one of the things about management and ownership. But the thing to take here is that the Milton Hershey School Trust owns 29% of shares outstanding. And because of a dual class structure, they have about 80% of the voting control. And so if you're buying this, you are buying a company that's controlled by basically the the hershey family to some extent it's it's this um it's in this trust that funds a school that they run um and there's about uh like i said

80 voting control so they're they're calling the shots at the end of the day that's been a fine bet for shareholders over the last 35 years as as you guys discussed and so that that does provide some confidence that, um, that at least some of the decisions that they've been making happens shareholder friendly, traditionally, um, there has been a little bit of selling from the trust to diversify trust assets outside of just the Hershey company, but that's having a de minimis effect on voting control because they're selling, at least from what I've seen, they've been selling shares that are, um, not the high voting shares. Basically, I think they're selling the class A shares. And so even though their ownership stakes coming down a little bit, their voting control is

remaining high. And that's a fairly limited amount that they've been selling. A couple of little quick points. Michelle Buck is the CEO, and she has been since 2017. She's actually been at the Hershey Company since 2005. So she spent a large portion of her career there in a variety of roles from, I think, chief growth officer to chief operating officer, all sorts of things. And she worked in, uh, consumer packaged goods and foods like this before, um, before starting at Hershey as well. And then one, one final point on this, um, BlackRock and Vanguard each own over 6% of the company. Um, and that's not super relevant, but it just kind of gives you an idea of the type of company that this is, is that this is the type of company that BlackRock and Vanguard have are

the second and third largest shareholders um so typically things that are a little bit steadier um kind of more kind of uh blue chip isn't quite the right term but a little a little steadier business yeah and they're when the the family's been selling they've been selling it back to the company and sort of basically a buyback sort of thing right am i not there have been some portions of that so there's like i think there was a deal in 2018 maybe where they sold about five million shares and four million went to uh i want to say it went to vanguard or something like that it went to i it wasn't vanguard but it went to some investment firm that they sold a block to and then they sold a million back to uh the hershey company and so they kind of have

been doing it's enough they have a big enough ownership stake that when they do sell it tends to be at least it seems to be um mostly in these block sales well though where they'll sell some back to the company and they'll sell some to directly to other um invest institutions all right good point uh this episode is brought to you by lakinta by windham here you are miles from home and ready to start your vacation good thing you're staying at lakinta by windham they have free high-speed wi-fi to stream all your favorite movies and in the morning get fresh waffles with their free bright side breakfast or squeeze in a workout at their fitness center either way you're ready to conquer the day. Tonight, La Quinta. Tomorrow, you triumph. Book your stay at

LQ.com. I'll talk valuation. Pretty simple one. Market cap, $43.5 billion, ticker HSY. Enterprise value is going to be about $48.1 billion because they have a low amount of cash and a decent amount of debt, which I'm sure Ian will hit on later. So enterprise value probably is the correct one to use here. Definitely don't want to discount or not use that debt that they have in their balance sheet. Enterprise value to operating income, which is going to be enterprise value divided by trailing 12-month operating income. That is 21.8. And then doing the same metric, but with free cashflow. So taking the enterprise value divided by their trailing 12-month free cashflow is 30. These are on the high end of their all-time valuation metrics. So

So CPG has been kind of been on a run lately. And with, you know, the market's valuation in general being up high, they're at one of their higher ranges than they typically have been. I think it's typically they've had, I think, well, it was a different metric. I think it was EV to EBITDA was closer to 15 normally. So it's a bit elevated, but not too crazy. 2.5 million dilutive securities outstanding. So these are options, RSUs or whatever, potentially dilutive securities.

That could be added to the share count, and that is versus only 206 million total shares outstanding. So not crazy amount of dilution, but they do have that in there. There is some SBC, but typically they've bought back more stock and reduced that share count, although it hasn't been that aggressive. And then they are a dividend payer, pretty healthy, and it's about 1.7%. So that should be factored in, I guess, when you're looking at the returns. Ryan, do you want to hit earnings?

Yeah. Their first quarter revenue was about $2.7 billion. That was up 16.1%. However, some of that was from an acquisition, which I'll be talking about in a second. But 83% of their revenue comes from that North America confectionery business. So like we talked about within North America, the Reese's, the Hershey's, all those candy brands. And then so organically and on a constant currency basis, so excluding the acquisitions and constant currency, revenue was still up 11.5% year over year. So strong growth. And then I want to highlight growth in the salty snack segment because it was really strong. So that burgeoning segment that they have or that they're trying to grow saw strong growth across the board. Skinny Pop sales were up 13.4% year-over-year. Pirate's Booty was up 55.5% year-over-year.

And then the Dots products, and I don't know if you guys have ever had those Dots pretzels, but there's a whole bunch of different pretzels that they make were up 103% year-over-year. Yeah, this is not the gummy candy, right? No, no, no, no. this is they're usually like the ones i've had are like the skinny pretzels like it's not in the shape of a pretzel but it's like a skinny pretzel kind of it's just like a stick and they're in like pretty google yeah i got google images here they're twisted sometimes yeah yeah using that was their sales have been aided by hershey's distribution i believe they were saying

that they're pretty popular in the west but they're they were saying this on the conference call that they have a big sort of West Coast presence, but they're starting to build that out on the East Coast and using Hershey's distribution to do that. So 103% growth in sales in that DOTS segment. And they also reported an operating profit margin of 27% for the quarter. That's growing about on pace. The moral of the story for Hershey over time has been reducing costs where possible, optimizing supply chain, and the margins have expanded subtly, but gradually over time. And then the shares outstanding has been declining slightly. It's not really enough to like, I didn't even do the math because it was barely any, but

ideally their cashflow per share should slightly outpace their revenue growth. and the revenue growth has grown at a durable, almost double-digit percentage from what I can tell. Yeah, and it was a little bit slower before Michelle Buck took over. If I was trying to look at their long-term metrics for this show, I didn't go into the whole deep history

because that takes a lot of work. But I think she's really done a good job of accelerating revenue growth since she took over in 2017. And I think a big part of that is the acquisitions of these salty snack brands. All right. Let's move to balance sheet. And what do you got? Head back to the streets and FX is the drop. A snowfall saga. Watch Wanda Bell and Leon Simmons fight to reinvent themselves in 90s Los Angeles,

where the fallout from the crack epidemic fuels the rise of West Coast rap. Ambition, loyalty and survival collide as everyone risks everything to build something lasting and FX is the drop a snowfall saga streaming September 9th on Hulu on Disney plus click or tap the banner to sign up now yep they've got um 338 million dollars in cash so not a huge cash position but their cash flow positive and should be plenty to do what they need to do with um they've got about three billion dollars in net PPE which is property plant and equipment and so So they do have, that's just to say that they do have some capital expense and capital expenditures that go on throughout the year because they have to, they've got the factories and they have to have all the equipment and all that type of stuff. So it's not like this isn't quite a software business that's super capital light and those types of things.

They've also got about $4 billion in long-term debt. So they do have a net debt position. This debt is spread out with different notes that have maturities from next year all the way until 2050. And it's spread out fairly evenly across that, actually. And almost all of the debt is between 2% and 4% interest. And so low interest debt on just about all of that. I think there was like $100 million that was at like 7% or something like that, but a fairly

minimal amount. One helpful ratio that I like to use when I'm looking at a company like this that has a lot of debt to kind of get a sense of, is this risky? Is it not risky? Just kind of get a ballpark idea about that is the EBITDA to interest expense ratio. And so that basically says, okay, what's the money, what's the cash that they're bringing in? And let's divide that by their interest expense to see how many times could they pay their interest with the cash that's coming in. And so if theoretically their cash coming in was cut in half, would they still be able to pay their debts? You can start to ask those types of questions. Their EBITDA to interest expense

ratio is 20.5 times, which basically means with the EBITDA that they're generating, the earnings they're generating, they could pay their interest 20 times. And so they've got plenty of money to pay their interest is basically the moral of the story. They seem like they're in pretty good position from a balance sheet standpoint, even though they have debt, which when we're looking at a lot of these software businesses, a lot of the software businesses don't have traditional debt like this. But for Hershey, they have some debt. It seems like they've got plenty of earnings to finance that. And because of some of the capital expenditures that they have to make and the hard assets they have, the debt kind of makes sense to

help finance some of those. And then also, if they look to get aggressive with acquisitions, they can tap those debt markets too. They've got some room to increase their leverage a little bit if they wanted to. Yeah, it would have just been so beautiful if they had even more debt at these low interest rates and then inflation was stuck around at like 7% to 9% a year. And they're basically can adjust,

like they're one of those companies that have no problems with adjusting to inflation. I mean, that just would have been awesome. And then buying back stock. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one.

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Let's move to anecdotal evidence. uh ryan added what is your favorite hershey brand so maybe we'll start with you ryan and then we'll move around the table yeah i mean that's that's pretty much everyone's anecdotal evidence right is the how you experienced it as a consumer and mine without a doubt is reese's um just the traditional no let's let's let's even go a layer further not the favorite brand but the favorite product and there was one that was like i'd see like even talking about that this is one of those companies that's kind of like weaponized nostalgia there's like that nostalgic factor um the i used to have it was it's almost like it's shaped like a hershey's bar but each one

was like a reese's like each little corner it was like bigger pieces but that was kind of my product that was the one i would always go for ah ian well i've got a bone to pick with you there because i also like uh that candy but i would call it a reese's uh you know i think i think just to be grammatically correct we've got a you know i think you are right it's a reese's candy but it is funny though because almost everybody calls it reese's or you know reese's pcs or whatever i'm like that doesn't but it is it's like you're right because it is it was the reese candy company so it's the last name is reese you just got to throw an apostrophe on that so it's reese's you're right yeah but anyways um my favorite is probably uh i don't eat them very

often but the york peppermint patties i always love when i get one of those some nice dark chocolate and some some mint i'm actually today i haven't really had much to eat today and so i've got a um i've got a bag of skinny pop here that i'm working on so i didn't even realize until i started looking at it, that that was a Hershey owned company, but I've become in the last couple of months, I've become a pretty big fan of Skinny Bob. Skinny Bob's solid. I've had that in the past. Um, yeah, mine, I, uh, I haven't had much of the candy recently, but when I was a kid, I had the York Pembroke patty in my lunch for school every day. One little small one. That was my, that was my treat every day for like years and years and years. So I got,

I think I have to say that one. I probably had that the most in my life. It's also worth noting that it's a fairly seasonal business in the sense that they have elevated sales around Halloween, Easter, and then I imagine there's some with Christmas as well. But Halloween and Easter seem to be the two big ones for them. Yeah, especially Halloween. All right, let's move on to future growth opportunities, Ian. so this is probably going to be an unpopular one and i almost hate myself for saying it but i'm going to go ahead and say healthy snacks they've talked about this a little bit um over the last couple of years and haven't had a whole lot of traction with it i saw that they've done a few sugar-free versions of some of their products which just doesn't like if you're eating candy like you're getting a you're getting a hershey bar i don't know that you really want the sugar-free

hershey bar right like i don't know it just it it hasn't caught on for them yet um doesn't seem to really be a meaningful part of the business, but I do think there's some ability to have, um, kind of the in-between zone where it's not like super healthy food. Um, but it's also not junk food. And so something like skinny pop might be an example that I may just be making myself feel better, but something that is kind of a salty snack, but it's a little better for you than traditional popcorn. And so I think that there's, um, some opportunity for them to do things like that. And I know Ryan's going to get more into some of those, but I think there's, I think there's a space that they could attack there where it's, it's not super healthy,

super healthy. You're not eating, you know, grasshoppers or, um, you know, having whatever it is, right. You're sweet green. It's not sweet green, right. It's not sweet green, but it's also, it's not Hershey's traditional products. So I think that people are looking for good snacks that taste good, but that aren't maybe as bad for them as a lot of the traditional snacks have been. Yeah. Ryan? What's wrong with grasshoppers, Ian? Come on now.

Yeah. No, playing off of Ian. Well, first of all, I think Ian's is right. I think the company's kind of going down that route as well. Last year, or not even last year, six months ago now, they acquired Dots Pretzels. So it was December 14th, 2021. That's when they completed the acquisition.

And it was for $1.2 billion, or they said it was a billion dollars net of expected future tax benefits. And DOTS has 55% share of the pretzel category, according to the press release. And as I mentioned earlier, they've been integrating DOTS into Hershey's distribution network, which has helped drastically ramp up sales. So 130%, 103% year-over-year sales growth in the DOTS space or with the DOTS brand. And it has taken some margin out of the business right now. And if you listen to the conference call, they talk a lot about that, that integration process and trying to combine supply chains has taken a little bit of profits out. But all in all, I think this is a replicable model where you acquire or even build it out

yourself, a salty snack brand. And then if you're acquiring it, you can use that Hershey distribution network to boost sales. I think they've seen a lot of success with Pirate's Booty, Skinny Pop, and Dots. I would imagine there's room for more acquisitions like that. Yeah. It is a smaller part of the business right now, but I believe it's the one that's growing the quickest. And I think these ones will play more potentially internationally, which I think we can talk about later why the chocolate stuff hasn't gone out of North America. Ryan? I have another thing that I read from the

conference call that was just kind of funny, but they talked about, I want to make sure it was Hershey, but I think a lot of convenience stores is a big market for them. People pick up candy. And so they asked, and this is going to tailor into yours a little bit, Brett, they said, has the price of gas affected your convenience store sales? Are people making less convenience store trips because they're trying to get off the road? Is there less mobility? And they said, what's happening actually is people are making more trips, not filling up the tank all the way. So they haven't really seen the impact of the convenience store, any detriment from this rising gas prices. Wow. Well, not that you're on that tangent,

but that's just a really inefficient way to go about it. You're spending more gas in the long run, but that's not what the show is about. All I've minded is inflation. And that's kind of a weird future growth opportunity, but this is, and you can see why people bid up the stock a bit when inflation started to kick in because it's a perfect business. Maybe Coca-Cola is the perfect one, but I think this is one of the closest to being, or maybe, you know, cigarettes or something, but this is the closest business to be perfect to operate in a high inflation environment. There's fairly low capital requirements, at least on a maintenance perspective. they have durable brands um and it's a small purchase price so it makes it very economical

to raise prices without getting complaints for customers so i mean you can't really pinpoint the exact price of a hershey bar you know it's not 10 bucks but i mean what is it a dollar 50 a dollar 75 they can raise incrementally without people really noticing and it's not going to tear into their wallet compared to something like gasoline, which everyone focuses on so much. So I think that's a big future growth opportunity for them if inflation is persistent. And if you're hedging the input costs, so you're keeping the input, the price of your cocoa products flat, inflation is pretty accretive to the bottom line. Well, it depends if there's, well, that's a specific inflation on like that one thing.

There could be inflation in other things and not COCO. Yeah, that's just their highest input cost. Yeah. All right. Let's move to highlights and lowlights. Ian. Yeah, I'd say my highlights, there's a lot of things we could say, but the key thing for me is that they've got well-established supply chains and distribution networks, which I think creates a large amount, right? Like they know where they're getting their stuff and they know where they're selling it. And I think as we were talking about earlier, there's a lot of things you can plug into that and find success.

And so I think that provides a lot of – that's the major highlight for me. The lowlights, I'd say, are one, just health uncertainty and regulation. I think there's some chances – and we've seen stuff like this in New York or California or I think in Washington and Oregon. And there's been some similar type laws, but laws that like, like a sugar tax or things of that nature, people seem to be getting more health conscious and whether that's, um, legislative perception that, cause all these companies, they're for revenues going up. Yes. And I, that's, that's the question.

I think there's just a little bit of uncertainty. I don't think that these businesses are going to go away. Um, and I think people will continue to, to eat these types of things and drink these types of things. but I, there's just a little bit of uncertainty there that I don't know if the shoe ever drops where there's some, uh, some meaningful transition away from these types of foods. Um, and then the other low light is this just that this tends to be a fairly low growth industry. And so that doesn't mean it can't be a good investment or anything like that, but it just

growth can solve a lot of problems. And this is traditionally not been a super high revenue growth um business yeah all right ryan highlights 100 years 100 plus years of durable growth uh and that plays into the the lindy effect which i want to describe the lindy effect just so everyone knows uh i just looked up what's the lindy effect it says the lindy effect is the idea that the older something gets or the older something is the longer it's likely to be around in the future. I can pretty much guarantee that this business will not cease to exist in 20 years. I can feel very confident saying that. I mean, the Hershey's Kiss just wrapped up its 100th anniversary. Unless there's an apocalypse. The only thing that could happen is an apocalypse.

I think there's worse problems than your stock price of Hershey, but it's just extremely durable And they aren't reliant on any one product to succeed because it's such a diverse portfolio. The lowlights for me, and this is kind of a cop-out, but the size of the confectionery business, especially in North America, it's hard for them to develop or acquire anything, and that is the majority of their business, that's going to really move the needle, especially in that market. and they've had some struggles internationally. So I would have a hard time resting my bull case on that changing anytime soon. Yeah, good points. All right, my highlights.

Yep, incredible durability. They have had a good, it's not necessarily a roll-up, but their acquisitions have been smart and it seems like the recent ones are growing quickly and hopefully they flow through and become more profitable over time. They are immune to almost all macroeconomic pressures

besides the prices of commodities that they hedge out um and there's lots of runway to buy snack food stuff like pirates booty and smart pop there's tons of those that come out that probably do you know like 100 million in revenue maybe up to 500 million in revenue if they're larger that are primed to be acquired even internationally as well um low lights i don't like that there's minimal international success here with the confectionery products it's just not as high quality as something like a coca-cola or a Pepsi that is just that one product, basically that one product that's globally throughout the world and has a higher quality brand. The brand quality seems slightly lower,

but still high. Will you explain why you asked that on Twitter and you got some good insightful responses? Will you explain why you think, or some people thought they had worse success internationally? Yeah, let me see. Well, a lot of people said taste like, explicit bad word. The, um, so Buffett talked about this cause they own C's candy. So they were studying it. Apparently sweets and chocolates, they vary by region a lot. So they, um, saw that it's more personal preference. And I could see that a lot of the European followers said that Hershey chocolate tastes

bad, but I think a lot of Americans would say, well, Hershey chocolate tastes fine. It's not like the best, but it's, it's fine. Um, and apparently that's why, uh, and Coca-Cola was like a totally new product. chocolate wasn't something that they invented. So it's like a whole new carbonated sort of thing. And then also, this was from Lawrence Hansel, who does a lot on CPG stuff and the history of these businesses. After World War II, Hershey, and this might have been a really poor choice because if they didn't, then maybe they could be as big as Coca-Cola is today, which has a much larger market cap. They decided to focus solely on the US market after World War II and let Nestle

and Cadbury and Mars go after the international space, which if you look at Hershey stock price, it's been fine, but they had that established brand or not established. They had that new brand penetration. Um, after the world war two victory, you kind of saw the victorious soldiers were eating the Hershey bars. A lot of say, you know, Japanese people and European people were like, Oh, this is the new American, uh, chocolate brand. But then they just kind of pulled out and didn't press the pedal on there um and then yeah so i think that's kind of why they've had minimal success um and they'd probably want to go through it by acquisition although it is pretty crowded and i don't know if some of those chocolate makers would want to sell to hershey so yeah

long-winded answer there also a lot of comments that said it was bad it's not it's like a unique taste it's like coca-cola coca-cola tastes frankly not that good it's just got that unique taste both Hershey and Reese's Reese's thank you Ian uh and Kit Kat I think they're big ones they don't they have this unique taste almost like a McDonald's or a Coca-Cola that isn't specifically chocolate it's that brand's taste you guys you guys agree with that yeah and I think a lot of people were saying when they were saying oh they don't they think that the Hershey's tastes like Whatever the explicit word is they used They're referring

Particularly to the Hershey's chocolate bar Not just like all their brands Right? Yeah, exactly Reese's is their largest One That's the biggest

I think it's the number one in the country Any other lawyers for me? Family Trust would be something to worry about But not really It seems like they've been fine They've been around forever And the stock's been good All right, bull case. Ian, what do you think?

So for me, I think the bull case is that acquisitions and salty snacks bump growth up to 5% to 10% a year for a number of years here. And margins improve by a few basis points every year. You get your dividend plus a slightly above market return with a fairly stable company. I think that's kind of the bull case here for me. All right, Ryan, what do you think? I think, well, you definitely get stability in the North American confectionery business. If we are in a super inflationary environment, that is also a bully for them. The other part of my bull case would be that their salty snacks and international categories see bigger growth and that there's more room for these acquisitions like DOTS.

and they're not only able to acquire these companies and just integrate them into the family, but they're able to bolster sales because they have more efficient supply chains and better reach. That, I think in total, could give them an above market return. And you're taking maybe a little less risk with that because this is such a durable business, but there's obviously a ceiling to growth here. Yeah. Yeah. I'm in a similar boat. You have the durability. So you have that in there. You slowly raise prices. You buy out companies maybe once every year. It seems like their pace has been and they're fairly small ones. And then add them into your network. You add on the dividend yield. You add in some buybacks that are tiny, but still got to count that in.

And maybe you get 10% plus annualized returns from here if you don't get big multiple compression. But I think multiple compression might lead us into the bear case. Ian, what could go wrong for an investment in Hershey? Yeah, I think what goes wrong here is you still get your dividends, but the growth is minuscule or non-existent and your money sits for years without meaningful returns, particularly because of the multiple that you're saying. It's trading at above average multiple right now compared to what it has been traditionally. And so you kind of get a little bit of multiple compression over the years.

and try and make buy with your dividend. I don't think this is the type of stock that's going to zero. Who knows? But I don't think you lose 90% of your capital in Hershey. But I think the bigger risk is that you just don't get a whole lot of growth. And maybe you could get some drawdowns because of the multiple you're buying it at right now. Yeah. Brian? Yeah. Multiple compression is probably the big one. The other, and not necessarily even a bear case, but just that there's other places that are better to have your capital. For me, it's hard to see revenue growth or free cashflow per share growth exceeding 10% by too much. Really? Not even free cashflow? Because they have seen strong operating leverage.

Yeah. I mean, it's been steady, but they've steadily expanded margins, but you're talking about 15%. That seems pretty optimistic. No, I said 10%. That was your note. I'm saying anything drastically exceeding 10%. I think 10% could be achievable, but it's hard for me to imagine that it's any higher than that. And I do think the multiple will come down. So you probably, I don't know. I think there's a high floor and a low ceiling is what it feels like. So maybe you get sub-market performance. I don't see you losing money over a 10-year period, but the opportunity costs, there might be better places elsewhere. Yeah. Mine is multiple compression. That seems to be the biggest risk for me,

but it's really hard to find anything else. Again, hard to imagine losing money over a decade, but I think the biggest thing is how much are you gaining compared to something else? All right, let's wrap things up more or less interested in final thoughts. I'm a little bit less interested. I think it's, like you said, it's a quality business. I think there are some headwinds that will be facing over the next 10 years in terms of health and competition maybe more direct to consumer brands,

which arguably benefits them too. But I, you know, I think that there's just a few headwinds. Um, and at the multiple you're paying today, uh, you know, traditionally like when you look at their free cashflow multiples, it's, it's at the high end, right. It's been higher for short periods of time, but not much. And this is the type of business that if you could get it a market multiple or below market multiple,

I think it gets a lot more interesting because you get high quality business and, um, and at a great price, uh, Given where it is today, you have to expect that they're going to execute well over the next couple of years to drive meaningful returns, I think. And I think there's some reason to believe that, but it's just not a bet that I'm super interested in making. All right, Ryan. Yeah, this isn't my – I don't typically look for companies that I think – or I don't typically buy companies where I think growth will be pretty low. And that's not where I typically dabble, but I definitely don't do it when it trades at a valuation premium to its historicals. Something that's been around this long, you probably want to be buying it where it's at a discount to its typical historical average, or at least in line with market average.

hard for me to, like I said, like if I were looking at this a year, I wish we visited this a year ago because I would have been probably when the opportunity cost was worse and I didn't think there was as much opportunities around, that would have been more exciting to me than now. Yeah. Let me look at free cashflow in the last year, EV to free cashflow. Right now we're about 30, but in July 20, let me look at the last three years chart. yeah it was well the only time it got below 20 was in the uh march 2020 drawdown for a slight bit there but yeah it was closer to 24 i guess for most of the year most of the last three years um so we'll see all right my final thoughts i'm interested more interested for sure i mean i had

it on my list of top five businesses of all time so i think i feel like i have to this feels like one where if for some reason and it's happened it's gotta have had to have happened throughout its history if it goes into a low low multiple for whatever reason gfc type deal um great financial crisis i think let me look at their max one here i feel like a buffett business i know i'm surprised they don't own it i think it's because of the ownership of the family can't can't take the outside position they probably weren't able to acquire it i'm surprised it never took a stake Like it was only, they could have taken a stake like with Coca-Cola back in the 90s, but maybe they didn't know.

Who knows what they were thinking back then. But yeah, I'm way more interested, not way more interested, definitely more interested, but yeah, not at this price. This seems like one where if it gets down to a free cashflow multiple below 15, it would be very, very hard to lose money, even if you don't grow because you have the dividend, hopefully they're buying back stock. um but if you're looking for low risk stuff outside of an index this feels like a perfect one to you perfect one to check out as long as you don't you know make sure to make sure that

multiple is not too crazy all right we have stock for next week and it is my turn um i guess ian you're not going to be here to do this one but we're going to be going to be doing far fetch limited it's down like 90 since we covered it uh i believe over a year ago so i want to do a revisited there i don't know what happened but the stock just totally collapsed um so we'll see we'll investigate why fashion platform or something i can't even remember what it is it's some sort of luxury fashion platform so yeah all right before we go i want to give a uh if you listened to our last you will have listened to the power hour probably if you listen to those i want to give a thanks to ian because he's been with us now for almost two years am i getting that

timing right that is correct almost two years the show has grown by a lot since he since he joined and so if you have appreciated his contributions and your listener feel free to give him a thanks on Twitter or wherever you can find him because he's been helpful to us. Yep. And we're still going to be doing the same show, but sometimes we may try to find someone else to join in,

but it might just be me and Ryan, or Ryan and I, excuse me. But yeah, thank you, Ian, for joining us and doing the shows. All right. That's going to do it for this episode. Thank you all for listening. Remember, we are not financial advisors.

Anything we say on this show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.