Feb. 12 (Bloomberg) -- Hedge fund manager D.E. Shaw & Co. has a sweet tooth for Hershey Co.'s depressed shares as Valentine's Day approaches and boxed-chocolate sales reach their annual peak.

D.E. Shaw has boosted its investment in the biggest U.S. chocolate maker by more than 10-fold, to a 0.7 percent stake, in the past seven months, according to data compiled by Bloomberg. The shares have lost almost half their market value since May 2005.

Mutual-fund manager T. Rowe Price Group Inc. more than doubled its holdings from June through September, becoming the Hershey, Pennsylvania-based company's fourth-largest shareholder with 3 percent of the stock. And activist hedge fund Highfields Capital Management LP bought 1.5 percent of Hershey's shares.

``Hershey is a pretty good buy right now,'' said Michael Crofton, who oversees $1.5 billion as chief executive officer at Philadelphia Trust Co. He cites a stock price that's near a four-year low, valuing the company at 18.7 times estimated earnings, compared with a price-to-earnings ratio of 24.8 for Chicago-based Tootsie Roll Industries Inc., and a dividend yield of 3.4 percent, at least 50 percent more than competitors.

Cadbury Schweppes Plc, the world's biggest candy maker, trades at 19.2 times estimated earnings. It gets more than a third of its revenue from a beverage unit, which it plans to spin off.

Crofton's firm, based in Philadelphia, boosted its Hershey stake by 34 percent to 673,000 shares as of Dec. 31. ``We would add to it if we had some cash,'' he said. ``People will eat Hershey bars regardless of what's happening in the economy.''

Week for Chocolate

With Valentine's Day on Feb. 14, this is the biggest week of the year for chocolate sales, according to New York-based market research firm Nielsen Co.

Valentine's Day is the year's biggest day for boxed- chocolate sales, the National Confectioners Association said. The Vienna, Virginia-based group predicts sales of chocolate and non-chocolate Valentine's Day candy will rise 3.8 percent this year to $1.08 billion, with three-quarters of that spent on chocolate. That increase would be less than last year's 6.7 percent gain to $971 million.

Hershey, the nation's second-biggest maker of boxed chocolates after closely held Kansas City, Missouri-based Russell Stover Candies Inc., has 17 percent of the market, according to Information Resources Inc., based in Chicago.

Hershey produces 3.5 billion chocolate bars a year that typically sell for less than $1 each. Its biggest selling brand is Reese's with more than $1 billion in annual sales.

Higher Dairy Costs

Total revenue was little changed last year at $4.95 billion. Profit fell for the second time in three years, dropping 62 percent to $214.2 million, partly because of higher dairy and energy costs.

On Jan. 24, Hershey forecast 2008 profit, excluding one- time costs, of $1.85 to $1.90, compared with $2.08 last year. Fifteen analysts surveyed by Bloomberg predict earnings will fall to $1.86.

On Jan. 25, Hershey slumped to $34.04 in New York Stock Exchange composite trading, the lowest since May 2003. The stock rose $1.34, or 3.9 percent, to $36.07 at 4:03 p.m. in New York trading.

``When you get to something like Hershey trading at four- year lows, you'd like to think you've flushed out everybody who isn't a fairly patient, long-term investor,'' said Colin Symons, who helps manage $330 million, including 142,420 Hershey shares, as chief investment officer of Symons Capital Management in Pittsburgh.

Milton Hershey's Legacy

Hershey Trust Co. is among the long-term investors. Established by founder Milton Hershey and his wife, Catherine, in 1909, the Hershey, Pennsylvania-based trust controls 78 percent of the voting power through a 31 percent stake. The trust exercises voting rights on behalf of the private Milton Hershey School, also in Hershey, Pennsylvania.

The trust initiated a sale of Hershey in 2002, which it eventually blocked because of opposition from state lawmakers. London-based Cadbury, and Vevey, Switzerland-based Nestle SA made a joint bid at the time as did Chicago-based gum maker Wm. Wrigley Jr. Co.

In November, the trust replaced 8 of 11 Hershey board members after saying it wasn't ``satisfied'' with the company's results. In October, CEO Rick Lenny, 56, resigned, and was replaced by President David West, 44.

Hershey is trying to counter flagging sales by cutting expenses. Last February it announced plans to eliminate 1,500 jobs and move some production to Mexico.

Rivalry With Mars

To reverse a loss of market share to closely held Mars Inc., the McLean, Virginia-based maker of M&Ms, Hershey is boosting advertising and coupon spending by 20 percent this year, executives said on a call with investors last month. Competitors spend about 10 percent of sales on advertising, while Hershey spends less than 3 percent, according to Deutsche Bank analyst Eric Katzman in New York.

On Jan. 28, Hershey announced its second price increase in less than a year, amounting to 13 percent on a third of its products. The company wields some leverage because it has almost no competition from store brands, which represent 1.6 percent of the chocolate market, according to Citigroup Inc. analyst David Driscoll, who has a ``buy'' rating on the stock. The price move is ``an initial step towards improving profitability,'' Driscoll wrote in a Jan. 28 note.

Next month, Hershey is introducing two brands, Starbucks and Bliss, to expand its participation in the faster-growing ``premium'' chocolate category.

Investors applaud the changes. ``They are doing some of the right things to repair the damage,'' Philadelphia Trust's Crofton said.

``Things should only get better,'' said Symons of Symons Capital Management.

Mum on Investments

Spokesmen for D.E. Shaw in New York, T. Rowe Price in Baltimore, and Highfields Capital Management in Boston declined to discuss their holdings. Hedge funds, such as D.E. Shaw and Highfields, are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested. Mutual funds, such as T. Rowe Price, mainly invest in stocks and fixed-income securities, and collect management fees.

Of 16 analysts surveyed by Bloomberg, only 2 recommend buying the shares, 11 say hold the stock and 3 say sell.

``We believe that more downside remains,'' Vincent Andrews, a New York-based Morgan Stanley analyst, wrote in a Jan. 25 note, urging investors to sell.

Matt Arnold, an analyst at Edward Jones & Co. in St. Louis, takes a different view. ``A lot of the damage, especially in terms of the stock, has already been done,'' said Arnold, who recommends buying the shares. ``The upside of actually improving the business, and hence, seeing the stock rebound from here is far better than the downside.''

To contact the reporter on this story: Josh Fineman in New York at jfineman@bloomberg.net

Last Updated: February 12, 2008 16:22 EST