Dominion Resources, Inc. (D), Hershey Co (HSY): Should You Pay a Premium for a Great Stock?

Hershey Co (NYSE:HSY) had a 43.3% market share in the U.S. chocolate market at year-end 2012, ahead of Mars/Wrigley at 30.7% and Nestle at 5.9%. In the U.S. total confectionery market,  Hershey Co (NYSE:HSY)’s share was 29.9% compared to Mars/Wrigley at 30.8%. Risks Hershey faces include reduced cocoa supply and rising prices, although the cocoa crop in recent years has been sufficient. I believe Hershey has the ability to raise prices and still retain customers. At an average of $1.50 per chocolate bar, Hershey could likely raise prices 10% without turning buyers away.

Giving new meaning to “premium beer”
I’ve never seen Boston Beer trade at such high multiples as it does now. Anheuser-Busch InBev is cheap in comparison, but A-B InBev is a fully mature company, whereas Boston Beer is a craft-brewing leader with only 1% share of the American beer market, leaving plenty of room to grow. Boston Beer is valued at a premium because the company’s sales are growing 15% to 20% annually — a trend I expect will continue due to rising demand for its many products, including Angry Orchard Cider and seasonal beers such as Octoberfest.

The company reported second-quarter 2013 net revenue of $181.3 million — an increase of 23% over the same period last year — mainly due to core shipment growth of 21%. Net income for the second quarter was $19.7 million, or $1.45 per diluted share — an increase of $5.4 million, or $0.39 per diluted share, from the second quarter of 2012.

Stocks trading at premiums get hammered if they don’t meet analyst expectations — for example, Boston Beer stock dropped 15% in two days after first-quarter earnings disappointed, though the stock recovered handsomely after second-quarter results were announced.

Still, there is a case for owning stocks valued at a premium. As Motley Fool co-founder David Gardner says, winning stocks tend to keep on winning.

The bottom line
I say own the best companies; their stocks tend to perform well over time. Dominion Resources, Inc. (NYSE:D), Hershey, and Boston Beer are dominant businesses with projected growth in sales and earnings. Buy stocks at a premium if you have a long-term outlook. Don’t panic if the stock dips in price; instead, consider buying more.

The article Should You Pay a Premium for a Great Stock? originally appeared on Fool.com and is written by Michael Hooper.

Michael Hooper owns shares of Boston Beer, Dominion Resources, and The Hershey Company. The Motley Fool recommends Boston Beer and Dominion Resources. The Motley Fool owns shares of Boston Beer.

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