Sweet and Sour on Hershey, and Where Gateway Might Go

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Hershey Foods (HSY)

Mike: Jim, I’ll bet you, like me, have been to Hershey, Pa.

Jim: Yes, and I’ve seen the Hershey Foods chocolate factory.

Mike: Where the lampposts are shaped like Hershey’s Kisses and the aroma of chocolate is as thick as the scent of jacarandas on the African coast ...

Jim: Uh, yeah. That’s the town, of course, where Milton Hershey started the company more than a century ago.

Mike: Right in the heart of Amish country, and why not? Hershey was a Mennonite. But I actually have a more pertinent question for you.

Jim: That’s a switch.

Mike: I know Halloween and Christmas are big seasons for candy sales, but apparently so is the back-to-school season. Why?

Jim: No clue. To get ready for all those school lunches?

Mike: Don’t kids have school lunches the rest of the school year? Maybe one of our readers will fill us in.

Jim: Hershey is one of the two powerhouses in U.S. candy, the other being Mars Inc. Hershey not only makes Kisses and the candy bars bearing its name, but also the Reese’s line of candy and Milk Duds.

Mike: Though Hershey has one thing Mars doesn’t have--a publicly traded stock.

Jim: Because Mars is privately held. Now, Mike, since I’m never one to let a cheap pun get away from me, I’d argue that the only dud at Hershey these days is the company itself.

Mike: I’m listening.

Jim: Hershey has posted disappointing earnings in five of the last six quarters. And it dropped a bombshell again last week, saying it’s having problems switching to a new computer system that tracks orders and distribution. That means it’s going to miss a ton of deliveries in that crucial second-half selling season you were talking about.

Mike: Well, let me say me say something in Hershey’s defense: The company knew this was going to happen and telegraphed it well in advance, allowing its retailers to step up orders earlier so that they’d be ready for this.

Jim: That’s nice, but its sales are still coming up more than $100 million short.

Mike: I know, but installing this kind of computer software, developed by German firm SAP, is one of the hardest managerial tasks out there. But companies do it because once it works, it works great.

Jim: You seem bullish on this stock.

Mike: I’m not wild about it, but I do think Hershey’s stock is a sound buy and that, contrary to your opinion, this is a well-managed company.

Jim: A lot of folks think Hershey is well-managed, and its stock tells the story. It’s gained more than 130% in the last five years, which isn’t quite as good as the benchmark Standard & Poor’s 500 index, but it’s not bad.

Mike: And it’s well ahead of most of its rivals in the food industry.

Jim: Granted. But I’d pass on Hershey.

Mike: Problems with the dentist lately?

Jim: It seems it’s been one thing or another with this outfit in the last year or two. First it was problems in Asia. Then it was the strong dollar and lousy currency translations. Then it was the soaring price of milk. Now it’s a computer hassle.

Mike: So you don’t think Hershey is well-managed.

Jim: It manages its core business well, and, granted, some of these snags are one-time events. But here’s my real problem with Hershey: The entire food industry, candy included, is a slow-growth business with annual sales gains in the single digits. It’s also hard for Hershey and its peers to raise prices to fatten profits. About the only way you can improve things is with new products, and Hershey has done that with items such as Hershey’s Bites.

Mike: Fair enough; this is sort of a dull business. But Hershey is a dominant player, and it recently refocused on its core confectionary business by shedding its pasta line, which included Ronzoni. So I think the stock is still a buy and could be a bit better than a market performer.

Jim: I’ll concede Hershey has good management, and with the stock trading in the low 50s, it’s only selling for 24 times earnings. But I’d do just as well putting my money in an S&P; 500 index fund.

Gateway (GTW)

Jim: Up next is Gateway, Mike, the well-known seller of made-to-order personal computers for consumers.

Mike: And also known for promoting its farmland roots. But this is actually now a Southern California company.

Jim: Based in San Diego.

Mike: And the reason it moved was that Ted Waitt, the co-founder and chairman, discovered that for some reason he was having trouble attracting high-skilled managerial talent to North Sioux Falls, S.D., where the company used to be headquartered. He thinks it’ll be easier attracting them to San Diego. I can’t imagine why.

Jim: Gateway’s long had this folksy image stemming from the fact that Waitt started the company in a farmhouse about 14 years ago. And the company underscored that mythology by painting cow spots on its shipping boxes. But this is a big company, with $7.5 billion in sales last year. And despite being a favorite of consumers, half of its revenue now comes from sales to business customers.

Mike: Well, let’s be more specific--small-business customers. In fact, one market segment that Gateway knows it will never penetrate is the large-business segment that’s owned by its competitor Dell Computer. That’s because Gateway has never invested in the sales and support infrastructure that it would need to serve the Fortune 2,000 companies. But I guess the question is: Is that bad?

Jim: I don’t think so. To Gateway’s credit, it’s long since understood that the future is not in selling boxes--that is, computers themselves--but in services, especially because PC prices are constantly falling. So Waitt’s trying to provide more electronic-commerce services through Gateway’s Web site, along with more software and more financing services for PC purchasers.

Mike: They’re also providing Internet access, as though they were a junior America Online.

Jim: Right, through Gate-way.net. They expect services to reach about 20% of the company’s total business by next year.

Mike: Well, my hat is off to them for a good try.

Jim: Uh-oh.

Mike: I see a lot of problems ahead for this company. For all you can talk about how clever they are by getting into services, everything they’re selling is a commodity. So they’re selling Internet access? Well, join the club. Internet-service prices are going to come well down. In financing they’re offering a program called YourWare, which is essentially a leasing deal in which the buyer pays on the installment plan and then turns in his or her computer for a new one a couple of years down the line, as we do when we turn in our Mercedes-Benzes and get this year’s model.

Jim: In your dreams. I must tell you I’m really on the fence with this stock, for a lot of the reasons you are--well, you’re not on the fence, are you? You wouldn’t buy this stock?

Mike: My first desktop computer was a Gateway, and my next desktop may well be a Gateway. But I wouldn’t buy the stock.

Jim: Why not?

Mike: Look, the core business of this company is one of sharply declining margins. It’s very erratic. There’s going to be a slowdown in PC sales, and I don’t see huge margins in some of these other businesses it’s getting into.

Beyond that, I think somehow Gateway has managed to revise history by opening up more than 160 retail stores.

Jim: Gateway Country stores.

Mike: This is after the Gateway story was: “We don’t have brick-and-mortar; we sell everything by mail order. We don’t have to carry inventory. We don’t have to build. We don’t have to deal with resellers.” Now they’re crowing about the share of their business that’s coming from their stores.

Jim: As well they should. Their PC sales are still extremely strong. That’s why Gateway’s profit soared another 47% in the second quarter of this year from a year earlier. At the moment, this company’s PC business is going great guns.

Mike: And its stock price is fully reflecting that.

Jim: But it wasn’t always so.

Mike: When I say “fully” I mean fully.

Jim: The stock’s trading at a 52-week high in the mid-50s, having just split 2 for 1. But between mid-’98 and mid-’99 this stock went basically flat, mainly on fears that the PC market was about to soften. But it’s stayed strong, and so I’m going to fall on the side of the fence that recommends this stock--as a holding for at least another year.

Mike: This stock is just now approaching the summit of the roller-coaster.

Jim: No, Gateway is starting to see a payoff from its services push, and I also like that the company has almost no long-term debt, which leaves it nimble to move into new fields of opportunity--no cow pun intended.

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Write or e-mail with a stock you would like to see discussed in this column. James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the new book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

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Hershey Foods, Monday: $52.75

Gateway, Monday: $53.88