On Jun 25, we maintained a Neutral recommendation on
The Hershey Company
), despite solid first-quarter results as we await substantial
visibility on its outside U.S. expansion efforts.
Why the Neutral Recommendation?
The chocolate giant's first-quarter 2013 (results announced on
Apr 25) earnings of $1.09 per share beat the Zacks Consensus
Estimate by 4.8%. Earnings also rose 13.5% from the prior-year
quarter driven by decent top-line growth and solid margins.
Revenues increased 5.5% driven by improving volume trends and
market share gains of core brands in the U.S. and the launch of
Brookside branded products. Hershey's adjusted gross margin
for the quarter expanded 240 basis points driven by lower input
costs, pricing and productivity benefits and improved
efficiencies from supply chain initiatives.
Moreover, Hershey raised its full year 2013 earnings outlook
as it expects to gain mainly from new products, international
expansion and lower input costs and other cost savings. The
company however, maintained its outlook for net sales growth
which is expected to be within its long-term targets of 5% - 7%
(including foreign exchange impact). Volume growth of core brands
in the U.S. and the expansion of five core brands in
international markets driven by increased investments in
advertising and go-to-market capabilities are expected to help
Hershey achieve its sales targets. Apart from these, increased
innovation such as Kit Kat Minis, Twizzlers Bites and Jolly
Ranchers Bites; and a broader launch of Brookside brand products
in the food, drug and mass channels will also benefit sales
Following the solid first-quarter results and the upbeat
outlook for the year, the Zacks Consensus Estimates mostly moved
upwards. The Zacks Consensus Estimate for both 2013 and 2014
increased by around 1% over the last 90 days.
The company's strong brand positioning, strategic marketing
investments in core brands, disciplined innovation and consumer
capabilities make it attractive.
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. Though the company
is accelerating investments in overseas markets, particularly in
Mexico, Brazil, India and China, competitors, like
Mondelez International Inc,
), already have a strong presence outside North America. We would
remain on the sidelines until we see some meaningful progress and
substantial profitability from these international expansion
Other Stocks to Consider
Hershey carries a Zacks Rank #3 (Hold). Other stocks in the
food business that are currently doing well and are worth
Flower Foods Inc.
B&G Foods Inc.
), both carrying a Zacks Rank #1 (Strong Buy).
B&G FOODS CL-A (BGS): Free Stock Analysis
FLOWERS FOODS (FLO): Free Stock Analysis
HERSHEY CO/THE (HSY): Free Stock Analysis
MONDELEZ INTL (MDLZ): Free Stock Analysis
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