Black Book Presentation (HSY)
Hershey is a compounder, a company that generates best-in-class risk-adjusted returns through economic cycles. The company's recurring revenues are built on dominant and durable intangible assets which have demonstrated pricing power. It has lower capital intensity than other consumer staples companies and earns higher margins. Hershey's shares have pulled back since the Q2 results. We are hosting a Black Book presentation on today, September 8th @ 12:30 PM ET. For the webcast & slides CLICK HERE at the time of the event.
Our investment thesis:
- HERSHEY HAS PRICING POWER: Hershey’s brands have demonstrated best-in-class pricing power during a period of once in a generation inflationary pressure. With continued inflationary pressures in key ingredients, 2023 will be another year of pricing-led growth and margin expansion. Hershey has one of the best secular growth prospects in food. The company has improved its M&A integration process giving it the confidence to seek more targets. Hershey has made a series of acquisitions in the category to grow its platform.
- NEW CONCERNS: A volume miss, concerns over GLP-1 drugs' impact on demand, and new competitive threats have put pressure on the shares. We will examine the concerns, stress test the risks, and outline the opportunities.
- VALUATION OPPORTUNITY: This year will be another year of sales and EPS growth above the long-term targets of 2-4% and 6-8% respectively. Hershey will be differentiated from CPG companies by having gross margin and EBITDA margin expansion while also having volume growth. We expect the margin recovery and sales visibility to be drivers of share price outperformance over a trade and trend duration.
Higher diesel (UTZ)
Diesel prices have increased more than 40% in the U.S. and Europe since May after Saudi Arabia cut production. In comparison, WTI and Brent crude prices increased ~13% over the same time frame. According to AAA, the national average price for gasoline rose $.07 per gallon in August while diesel rose $.42.
Despite the fuel price increases we are still in a freight recession. The number of loads posted on the DAT One network fell by 3.2% for the week ended September 7 compared to the previous week. Compared to the previous year loads were 39% lower and compared to the same week in 2019 loads were 15% lower. Volume on the Truckstop system was 21% lower for the week ended September 1 compared to the prior year and 25% lower than the five-year average for the week. Van truck contract and spot rates are both 16% lower than the prior year.
Truck companies generally pass on higher diesel costs through surcharges to the shippers. Lower freight and logistics costs have been a COGS tailwind this year for CPG companies. Companies shipping lower-value products are more impacted by freight costs than higher-value shipments.
Wage inflection? (WMT)
The Wall Street Journal reported that Walmart is paying some new employees less than they were three months ago. According to the article, Walmart changed its wage structure in mid-July. Now most new employees will be paid at the lowest possible hourly wage. Previously some new hires including digital order pickers would have made slightly more than other new employees. Existing employees will not see a change in their pay. It’s a slight change in pay for a few employees, but it could be a signal for a change in the labor supply.
