In order to strengthen its position in the emerging markets,
The Hershey Company
(
HSY
) recently agreed to acquire the remaining 49% stake in Godrej
Hershey Ltd. from Godrej Industries Ltd. and another small
shareholder. The Hershey Company already holds 51% stake in Godrej
Hershey.
Godrej Hershey was formed as a result of a joint venture between
The Hershey Company (USA) and Godrej Group in 2007. The company has
several well known brands in its portfolio like Hershey, Mahalacto,
Nutrine, Jumpin & Sofit. Godrej Hershey operates in several
categories such as confectionery, beverages and grocery items.
However, Godrej Hershey has been running at a loss and has incurred
$47.6 million in debt.
According to the agreement, Hershey will own all the brands of
Godrej Hershey, like MahaLacto, Nutrine candy, Jumpin and Sofit,
along with its manufacturing facilities. The company will also
assume $47.6 million in debt. The transaction is expected to be
completed by the end of the third quarter of 2012. After the
completion of the process, the new wholly-owned subsidiary of The
Hershey Company will be known as Hershey India.
With this acquisition, Hershey will be able to integrate Godrej
Hershey into its global business and will be able to use its
expertise to enhance growth. The company intends to offer greater
support in terms of brand building, product innovation and
infrastructure in order to drive growth in the Indian Market.
India is one of the fastest growing markets with a large consumer
base and increasing consumer spending. With the growing numbers in
the middle income group, India has a huge potential for growth in
the confectionery and beverage market.
Hershey, as a global leader in the chocolate and sugar
confectionery market, will be able to capitalize on this
opportunity by making the necessary investments. Also, the company
will be able to compete with other global chocolate and sugar
confectionery leaders like
Kraft Foods Inc.
(
KFT
), who have been focusing on expansion in these emerging markets.
Hershey posted a strong second quarter performance, with its
earnings of $0.66 per share beating the Zacks Consensus Estimate by
8%. Also, earnings increased 17.9% from the prior-year quarter,
driven by revenue growth and improved gross margins.
For fiscal 2012, Hershey expects to record adjusted earnings in
the range of $3.17-$3.23 per share, up from the prior forecast of
$3.11-$3.17 per share on improved gross margins. The Zacks
Consensus Estimate of $3.23 is at the upper end of the guided
range.
We are impressed by the company's solid first half performance and
its strong brand positioning, strategic marketing investments in
core brands and disciplined innovation. However, higher ingredient
costs and lack of significant presence outside the U.S. keep us on
the sidelines. We currently have a Neutral recommendation on The
Hershey Company. The stock carries a Zacks #2 Rank (a short-term
Buy rating).
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