On Mar 15, we maintained a Neutral recommendation on The
Hershey Company ( HSY ), following mixed
fourth-quarter results announced on Jan 31.
Why the Neutral Recommendation?
Hershey's fourth-quarter 2012 earnings of 74 cents per share
missed the Zacks Consensus Estimate by a penny. Top-line
growth was offset by rising advertising expenses, thus causing the
earnings miss. Earnings, however, rose 5.7% from the prior-year
quarter. Net sales also rose 11.7% to $1.75 from the prior-year
quarter, driven largely by core brand volume growth in the U.S.
Despite the earnings miss, Hershey raised its full-year 2013
earnings outlook as it expects to gain from increased investments
behind advertising and consumer promotions and lower input costs
and other cost savings.
We are impressed by the HSY's strong performance in all the
quarters of 2012. Hershey upped its earnings guidance in all the
quarters of 2012, highlighting its attractive earnings potential.
Hershey seems to be poised well for the next quarter as well with
Earnings Expected Surprise Prediction (ESP) (Read: Zacks Earnings ESP: A Better Method ) standing
Moreover, the company's strong brand positioning, strategic
marketing investments in core brands, disciplined innovation, and
consumer capabilities make it attractive.
Despite Hershey missing estimate in the fourth quarter, future
estimates have been mostly revised upwards following the increase
in the earnings guidance for 2013. The Zacks Consensus Estimate for
2013 rose 1% to 3.63 cents while that for 2014 increased 0.3% to
$3.99 in the past 60 days. Accordingly, the stock carries a Zacks
However, Hershey's lack of presence outside the U.S. keeps us on
the sidelines. More than 80% of the company's business is generated
in the U.S. Markets outside the U.S have accounted for only 14%-16%
of the company's net sales between 2010 and 2012.
Hershey is accelerating investments in overseas markets,
particularly in Mexico, Brazil, India and China. However,
competitors like Mondelez International ( MDLZ ) have a
significantly stronger presence outside North America.
Other Stocks to Consider
Besides Hershey, other stocks in the retail food sector that are
currently performing well include ConAgra Foods,
Inc ( CAG )
and Kellogg Company ( K ). Both the companies
carry a Zacks Rank #2 (Buy).CONAGRA FOODS (CAG): Free Stock Analysis ReportHERSHEY CO/THE (HSY): Free Stock Analysis
ReportKELLOGG CO (K): Free Stock Analysis ReportMONDELEZ INTL (MDLZ): Free Stock Analysis
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