Shareholders of both Merck and Pfizer have much bigger problems than just selling bad drugs. And as always, all of the problems start at the top.
- Dec 04, 2004
- admin
- Investing
OK, NOW IT’S PERSONAL.
No, it wasn’t the news that Producer Price Index (PPI) shot up
an unexpected .5 percent in November.
I could’ve slept through that one.
Nor was it the news that prices of personal care products rose
1.6 percent during the past three months.
Heck, what do I know about personal care products anyway?
Other than Gilette (SYM: G) razors, none of that other stuff
ever did anything to make MY mug look more presentable.
And it certainly wasn’t the news about the year-to-date increase
in energy prices.
At this stage of the game I don’t even bother asking the gas
station attendant to take me out to dinner before they give it
to me.
No, the news that pissed me off the most concerned a certain
chocolate manufacturer located in Hershey, Pennsylvania.
The same chocolate manufacturer responsible for the
tormenting binge/purge obsession I’ve carried with me since the
days of youth.
The very same chocolate manufacturer who Jack Lalane gets on
his knees and thanks every night before he goes to bed.
Yes, ladies and gentlemen, if you’re still in denial, the
name of the company in question is Hershey Foods (SYM: HSY)
What made it so personal for me was their announcement last week
that they were raising prices by close to 6 percent.
6 percent!
That means that for every dollar I spend on chocolate I just
got slapped with a additional “tax” of 6 cents.
And for those vaguely familiar with the size of my waistline,
that’s a fair sized tax!
Now do you know why it’s so personal?
As a matter of fact, as soon as I hung up the phone with my tailor
(who was kind enough to share the “good” news with me), I began to
dig through my economic notes.
Guess what I found out?
I found out that Hershey had every right to do what they did.
Why?
Because the Producer Price Index (PPI) has risen a whopping
5 percent during the past 12 months.
5 percent’s a big number.
A 5 percent rise in producer prices means that it costs companies
like Hershey more money to make chocolate.
Think about that for a moment.
If you sell $100 worth of chocolate each day and it cost you $80
to do it, if you don’t raise prices, your profit is going to
automatically decline by $4 next year (5 percent of $80).
That means that your $20 in net profit turns into $16 before the
year even starts.
That’s not good.
And if your profit declines by 20 percent then it’s safe to
assume that your stock is sure to follow.
That’s why Hershey raised prices.
As a matter of fact, Hershey has such a powerful (read: addicting)
product that they’re able to raise prices above the rate of inflation.
They raised prices by almost 6 percent (5.8 percent to be exact).
That means that Hershey is getting to have its cake…, er, chocolate
and eat it too.
You know why?
Using the example from above, Hershey is now selling
chocolate for $106 instead of $100 per day.
But the cost to make the chocolate has risen by only $4.
Therefore, Hershey, in all it’s Willy Wonka glory, is actually
pocketing an extra $2 per day.
When you sell billions of dollars of chocolate each year that
adds up.
But most companies don’t have that luxury.
Think about it.
Some companies that you own sell $100 in products per day don’t have
pricing power at all.
They have to absorb the cost all by their lonesome.
Thus, their profits are bound to decline along with their stocks.
But you know what’s even worse?
A company that is in an industry where prices are actually DECLINING.
So, instead of making $100 per day next year, they’ll only sell their
products for $98 per day.
In addition, their costs have gone from $80 to $84.
What happens then?
They watch their profit decline from from $20 to $14.
You could guess what happens to their stocks as well.
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–Dylan Jovine