American chocolate icon Hershey (HSY: Charts, News, Offers) found itself in the unflattering media spotlight this week after the State Department announced an investigation of its business practices regarding foreign students at its Pennsylvania factory. 400 foreign students, who paid to enter a cultural exchange program, were employed by the company for two months in a program traditionally focused on studying English and part-time work in seasonal tourism jobs. Although the students were paid at the seemingly fair $8.35 hourly rate, the same as American workers, program fees and rent were directly deducted from their pay, leaving them with even less money than they started with prior to entering the United States. The students were given shifts exceeding 40 hours weekly, including night shifts lasting from 11 PM to 7 AM, and subject to pressure to work faster and harder on Hershey’s factory lines.
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Last week, the students staged a walkout and protest at the factory, attracting widespread media attention to the alleged abuses at Hershey. The protest at the Palmyra, Pennsylvania plant marks the first time in American history that foreign students have engaged in a large scale labor strike. The students have demanded a reimbursement of travel expenses as well as an investigation of the poor working conditions in the factory.
The students held J-1 visas, which were the subject of an Associated Press investigation last December, which reported that federal immigration officials were investigating human-trafficking abuse cases, which solicited J-1 visa holders to work in strip clubs and other red light businesses. American businesses had been tempted to use J-1 workers due to an 8% savings per foreign worker due to the lack of Social Security and other taxes.
Harika Dugyu Ozner, a 19-year old medical student from Istanbul, told the New York Times, “We are supposed to be here for cultural exchange and education, but we are just cheap laborers.” Zhao Huijiao, a 20-year old student in international relations from Dalian, China, told the Times, “There is no cultural exchange, none. It is just work, work faster, work.” Several students reported paying up to $6,000 for the entire “cultural experience,” which turned out to be nothing more than the experience of working at an American chocolate sweatshop. While the students were able to retain roughly $40 to $140 of their earnings for their 40-hour workweeks, the last straw was learning that their local neighbors, at the apartment provided by the cultural exchange program, paid significantly lower rent, leading to speculation that the program was padding its charges considerably.
Hershey defended itself by passing the buck to Exel, the company which runs the Palmyra plant, claiming that the company did not engage in direct factory operations. Exel claimed that it found the student workers through an unnamed staffing company. In the meantime, Hershey has hired a contractor to fill the vacant jobs at the plant, and declared that the protest wouldn’t affect its production capabilities. A spokesman for the company also stated, “The Hershey Company expects all of its vendors to treat their employees fairly and equitably.”
While this doesn’t affect Hershey’s relative strength in the market, it has certainly damaged its PR. At its current price, Hershey shares trade with a cheap forward P/E of 18 and pays a respectable 2.5% dividend. The company also boasts an incredible 54.3 return on equity, and its respective operating and net profit margins of 17.2% and 9.8% are both a substantial increase over last year’s respective 15.96% and 8.99%. These numbers are significant due to shrinking margins across the food industry, with H.J. Heinz (HNZ: Charts, News, Offers), Pepsi (PEP: Charts, News, Offers) and Kraft (KFT: Charts, News, Offers) all reporting mixed guidance due to rising food costs and inflation. Hershey’s is less aggressive than its peers, opting to increase prices while reducing content slightly to balance out its margins. So far, this strategy has worked, posting net income of $130 million and revenue of $1.32 billion. That’s an increase of 178% and 7.5%, respectively. Its EPS of 56 cents per share beat analysts’ estimates by a penny. Hershey also provided sweet guidance for full-year EPS growth of 10%, an increase from the 6-8% it posted earlier in the year. Revenue is also expected to increase to 6%, up from the previous estimate of 3-5%.
Hershey’s weakness is a glaring one – limited exposure to international markets and a heavy reliance on domestic business. This is the business model most American companies have been seeking to avoid, most notably Kraft, which has established a huge presence in India and China. If the company can expand intelligently into these markets and avoid PR debacles like its chocolate sweatshop, then investors can be assured that the company is a good defensive safe haven stock in times of market turbulence.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
I have friends working there. They all got fired for going to strike.
Also note the four current federal investigations into exploitation of J-1 student workers at the Hershey’s plant: OSHA, OSHA Whistleblower Protection Program, Department of Labor Wage and Hour Division, U.S. State Department – goo.gl/S4PMp