Monday, February 20, 2006

Hershey's Not as Sweet As It Looks

Hershey (HSY) lost revenue momo in its fourth quarter, which caught most investors by surprise.

For 100 years, Hershey has been selling chocolate and non-chocolate candy goods. The company is extremely profitable and well-run.

The company's wide economic moat makes the stock, at a first glance, look very appealing.

Unbelievably, even with 45% market share in the chocolate space (blockbuster brands include Kit Kat, Mild Duds, and Bubble Yum), Hershey has plenty of room to grow if it utilizes its brand equity to tap into international markets.

However, the consensus on the Street seems to be that sales will slow down again in 2006, especially since the company has just come off a massive product launch (2004-2005 saw over 15 new candies hit shelves).

The biggest risk Hershey faces isn't saturation, however -- it is the trend toward healthier eating regimens.

The more we see stocks like Weight Watchers (WTW), Herbalife (HLF), and especially Nutrisystem (NTRI) rip the cover off the ball, the less we want to be buyers of Hershey.

We are initiating coverage on the stock with a neutral rating.

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