Forget Kraft and Cadbury -- Hershey is the sweet spot for investors
Posted
Sep 08 2009, 03:05 PM
by
Louis Navellier
Rating:
On Monday, Kraft Foods (KFT) stunned the investing world by offering to merge with Cadbury PLC (CBY) for $16.7 billion. That represented a 42% premium to Cadbury’s stock price. But what was even more stunning is that Cadbury’s board turned the offer down. They called Kraft’s bid “fundamentally inadequate.” Ouch!
If most people were offered a 42% premium on something—anything—they’d take it, so I have to credit Cadbury’s board for showing some moxie. At least they believe in their company.
Apparently, they’re not alone. Shares of Cadbury have surged on the news that someone else will make a bid for them. This is typical Wall Street—if one company is an interested buyer, then they all must be.
Bing: Kraft and Cadbury
So what’s going to happen now? I fully expect Kraft will come back to Cadbury with a sweetened offer. If I were Cadbury, I wouldn’t try to be too cute with potential suitors. Some analysts think the company could fetch as much as $21 billion, which is a lot of chocolate eggs. I currently rate both Kraft and Cadbury as sells, so almost any offer is worth taking.
Wall Street is a big playing field, so lots of corporate boards are watching this action and some are certainly interested in Cadbury.
Other Potential Suitors for Cadbury
Mega-mergers aren’t new in the candy biz. Last year, Mars took over Wrigley for $23 billion. Nestle is almost certainly interested in Cadbury. Some analysts think Pepsi (PEP) could jump in but I highly doubt it. My advice to investors is to have fun watching the price war, but steer clear of the fireworks. Instead, focus on my favorite stock in the sector, Hershey (HSY).
Hershey is an iconic name with huge brand loyalty and has seen sales boom as a result in the recession. The company’s products include Hershey kisses, Reese’s peanut butter cups, Swizzles licorice, Mounds, York Peppermint Patty and Kit Kat (licensed from Nestle). To be honest, I’m not much of a chocolate-lover myself, but if there’s a bowl of Hershey kisses with almonds, well…I have to eat at least one.
In tough times, people turn to small comforts like chocolate. The proof is in the profits. In the second quarter, Hershey saw sales and earnings jump even while the majority of other companies suffered. Earnings came in at 43 cents a share, which was nearly 50% higher than a year before. It also topped Wall Street’s forecast by eight cents a share. You can be sure that the government won't need to offer a Cash For Kit Kats program any time soon.
I also like the fact that Hershey does a lot of business overseas. Considering it grew sales and profits even while a strong dollar held back this stock in the first half of 2009, I expect great results, as stressed-out shoppers continue to find relief in junk food.
There’s talk that Hershey could jump in and make a bid for Cadbury. Sure, it’s possible, but it would take some creativity. A more likely scenario would be Hershey teaming up with a private equity partner, or even teaming up with Nestle. Stranger things have happened. Hershey and Cadbury even talked about merging a few years ago. The crucial fact is that financing markets are open again so that will fuel merger mania.
Whatever the outcome of the Kraft-Cadbury drama, it has certainly renewed interest in the sector, which will benefit Hershey. The stock is an excellent buy.
At the time of publication, Louis Navellier held positions in Kraft and Hershey.
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