On Aug 30, we maintained a Neutral recommendation on
The Hershey Company
) despite solid second-quarter results as we await substantial
visibility on its outside U.S. expansion efforts.
Why the Neutral Recommendation?
The chocolate giant's second-quarter 2013 (results announced
on Jul 25) earnings of 72 cents per share beat the Zacks
Consensus Estimate by a penny. Earnings also rose 9.1% from the
prior-year quarter driven by better-than-expected top-line growth
and solid margins. Revenues increased 6.7%, higher than
management's expectations, due to sales volume gains. Volumes
grew due to market share gains of core brands, product launches
and contribution from the Brookside brand products, launched in
the last quarter.
Moreover, Hershey raised its 2013 earnings guidance for the
second time this year as it expects to gain from core brand
volume growth, innovation, the Brookside acquisition,
international expansion, lower input costs and better fixed cost
leverage. The revenues and gross margin expectations were also
upped and the company increased its dividend.
Hershey now expects 2013 net sales to increase about 7%
(including foreign exchange impact) better than prior expectation
of its being within the long-term target range of 5%-7%.
Management raised sales guidance as it expects international
sales to accelerate and the current positive category momentum in
the U.S. to continue in the second half. Gross margins are
expected to expand by 220 basis points (bps) to 230 bps in 2013
up from prior expectations of 190 bps to 210 bps, driven by input
cost deflation, higher productivity and greater fixed cost
leverage. The company upped its adjusted earnings guidance to a
range of $3.68-$3.71 per share from the prior expectation of
$3.61-$3.65 following encouraging performance in the first half
of the year.
Following the solid second-quarter results and the upbeat
outlook for the year, the Zacks Consensus Estimate mostly moved
upwards. The Zacks Consensus Estimate for 2013 increased 1.1% and
that for 2014 went up 1.5% over the last 60 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 #2 (Buy). Another
food/confectionery company worth considering includes
Crumbs Bake Shop, Inc.
), also carrying a Zacks Rank #2 (Buy). Another food company
which is currently doing well is
Pinnacle Foods Inc.
), carrying a Zacks Rank #1 (Strong Buy).
CRUMBS BAKE SHP (CRMB): Free Stock Analysis
HERSHEY CO/THE (HSY): Free Stock Analysis
MONDELEZ INTL (MDLZ): Free Stock Analysis
PINNACLE FOODS (PF): Free Stock Analysis
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