Hershey Creamery, a multibagger or mediocre?

Hershey Creamery (HRCY.PK)

Price: $1750 (4/3/2012) - Note doesn't trade often beware!!

I want to thank a reader who's an avid pink sheet investor for sending me some information on this stock along with a few others.  The information sent was invaluable.

Hershey Creamery is a ice cream manufacturer and distributer located in Harrisburg Pennsylvania.  They've been in business since 1894 and were started by the Hershey brothers.  Hershey Creamery is a completely separate company and has no relation to Hershey the candy company located in Hershey PA which is just down the road from Harrisburg.

Hershey Creamery manufacturers both ice cream, ice cream novelties, smoothies, and ice cream coffee drinks.  The company has an interesting distribution arrangement, they don't distribute to common grocery stores but rather distribute to stores where they can be the dominant ice cream product.  This means if you're at a Giant Eagle you won't find Hershey Ice Cream, but if you're at MacBeth's Gift Shop in Cooksburg PA you'll find the freezer stocked full (I speak from experience regarding MacBeths).

I've had Hershey Ice Cream in the past, but wanted to try it again before doing this post.  Unfortunately the place that sells it near my house has either closed for good or hasn't opened for the season yet.  We ended up getting some ice cream at a local place down the road which was awesome, but is a moot point in researching for this post.

The company has been run by the Holder family since the 1920s.  George Hughes Holder was the President and Chairman until he passed away in 2009.  The company is now run by his three sons.

Why is the company interesting?

Hershey Creamery is a typical unlisted company, they run like a private company but have shares that seem to trade on an ad-hoc basis.  The last time Hershey Creamery shares traded was January 23rd, when six shares traded hands.  The company has 96,066 shares outstanding but most reside as treasury stock, there are only 35,359 outstanding, and the majority of those are held by the Holder family.

Here are a few interesting items regarding the company:

• Hershey Ice Cream is sold in 28 states.
• The company operates 22 distribution centers.
• They're still headquartered in the same place as where they started in the 1800s.
• In 2010 they had $94m in sales, $4m in operating income and $3.7m in net income.
• EPS of $105.92 and a dividend of $16.80/sh
• The company has a $61.8m market cap
• Enterprise value of $15m if you include their portfolio of marketable securities (stocks, and cash)
• EV/EBIT of 3.77
• EV/FCF of 11.8
• ROE 4.12%
• ROE ex-cash of 8.48%

Here is the net-net worksheet:

What's it worth?


Hershey Creamery isn't a stellar business but they're pretty steady.  If you take into account the overcapitalization they're probably close to fairly valued currently.  On a cash plus operating business basis I can see maybe $2000 being a fair value, and $1750 isn't that far off, especially in the pink sheet world. 

Some people might argue that the company should trade at book value which would mean the company would be worth around $2565 a share.

The reality though is Hershey will probably trade where it's at unless either earnings explode (unlikely especially with high fuel costs) or if the company is bought out.  A buyout is the most likely way any value is going to be realized for a shareholder of Hershey Creamery.

I was able to get some stats on ice cream company buyouts over the years from Adam at ValueUncovered (big thanks!) and put together a spreadsheet showing what that might mean for Hershey Creamery.  I used price to sales because this was the most consistent ratio I could find in the dataset.

So going through the buyout data we get a range of possible values for Hershey going from $3706 a share to $10339 a share.  All significantly higher than what it trades at today, but all betting that the family that has run Hershey Creamery since 1920 decides to sell.

While there's significant upside for a shareholder if Hershey Creamery is sold I'm not optimistic that the company will actually be sold in the near future.  George Hughes Holder's sons seem intent on running the business the same way as their father did including keeping a large hoard of cash and paying out a paltry dividend.  If the company increased their payout, or something changed leading me to believe the sons were going to sell I would become very interested in Hershey Creamery, until then I'm content to watch them from the sidelines.

Talk to Nate about Hershey Creamery

Disclosure: No position