We maintained our Neutral recommendation on
The Hershey Company
)following another impressive performance in the second quarter of
Hershey's second quarter 2012 earnings of 66 cents per share
beat the Zacks Consensus Estimate by 8%. Also, earnings increased
17.9% from the prior-year quarter, driven by revenue growth and
improved gross margins. Net sales rose 6.7% to $1.41 billion
from the prior-year quarter, mainly buoyed by increased pricing.
Gross margin expanded 170 basis points as pricing and productivity
benefits and improved efficiencies from the company's supply chain
initiatives offset headwinds from rising input costs. We are
impressed with the company's solid first half performance. The
company also upped its sales and earnings guidance, for the second
time this year, highlighting its attractive earnings potential.
Moreover, the company's strong brand positioning, strategic
investments in core brands, disciplined innovation, and consumer
capabilities make it attractive.
Hershey is the largest producer of quality chocolate in North
America and markets some of the world's leading brands which enjoy
widespread consumer acceptance. The company is also a global leader
in chocolate and sugar confectionery products, which is an
attractive category as confectionery products are easily available,
affordable and highly indulgent; thus making it almost recession
resistant. The company is well known for chocolates like Hershey's,
Reese's, and Kisses, as well as non-chocolate confectioneries, such
as Jolly Rancher candy, Ice Breakers chewing gum, Breath Savers
mints, and Bubble Yum bubble gum.
Hershey invests in core brand marketing, continuously launches
new products and conducts advertising and promotional campaigns to
stimulate sales. These resulted in consistent growth that continues
to outstrip the company's long-term targets. The company invests in
advertising and marketing capabilities to build its brands globally
and monitors the performance of its brands. The company's strong
brand investments give it a competitive advantage and are one of
the principal reasons behind the company witnessing better volume
elasticity and margin gains than its peers.
In an effort to boost long-term growth, management has embarked
on several programs to divest low-margin brands, improve supply
chain efficiencies and implement cost-reduction initiatives. These
strategies have helped to restrict effects from rising input costs
and expand margins.
However, more than 80% of the company's business is generated in
the U.S. In 2011, only around 15% of net sales were generated
outside U.S. The company is gradually accelerating its investments
in overseas markets, particularly in Mexico, Brazil, India and
China. Management believes that the higher growth rates in the
emerging and developing markets will help its international
business to account for 25% of the company's business over the next
five years, up from the current share of 10%.
However, competitors like
Kraft Foods, Inc.
) have a much more strong presence outside North America. Kraft
Foods' purchase of Cadbury in January 2010 has opened new sales
channels for the company through the latter's vast distribution
networks in developing markets such as India, Brazil and Mexico.
Kraft Foods' solid presence outside U.S. has hurt Hershey's
international prospects significantly. Higher ingredient costs and
a lack of significant presence outside U.S. keep us on the
HERSHEY CO/THE (HSY): Free Stock Analysis
KRAFT FOODS INC (KFT): Free Stock Analysis
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