The Hershey CompanyHSY is set to report first-quarter 2015 results on Apr 23, before the market opens. Last quarter, the company delivered a negative earnings surprise of 1.89%. Let's see how things are shaping up for this announcement.
Factors at Play
Lower retail store traffic, intensifying competition from the broader snacking category and soft international growth hurt Hershey's top line significantly in 2014. We expect these headwinds to continue in 2015 as well. First-quarter net sales growth (including acquisitions) is expected to be near the lower end of the annual sales target of 5.5% to 7.5% due to soft international sales and a shorter Easter holiday.
Moreover, higher commodity costs significantly hurt margins in 2014. The costs of Hershey's key ingredients like dairy, nuts, cocoa and sugar increased dramatically last year. In response, the companyraised the prices of its chocolates and candies which hurt volumes.
However, gross margins are expected to improve in 2015 gaining from price increases, recent decline in input costs and productivity gains. Dairy and cocoa costs are down from the highs in 2014 which should benefit gross margins.
Nevertheless, first-quarter earnings growth is expected to remain under pressure because of softer sales and investments in brand building and selling capabilities.
Our proven model does not conclusively show that Hershey is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP is -0.86% as the Most Accurate estimate stands at $1.16 per share, while the Zacks Consensus Estimate is pegged higher at $1.17 per share.
Zacks Rank: Hershey's Zacks Rank #3 (Hold) increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.
We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
Some stocks in the broader food/beverage sector that have both a positive Earnings ESP and a favorable Zacks Rank are:
Treehouse Foods, Inc. THS , with an Earnings ESP of +1.72% and a Zacks Rank #3.
The Hain Celestial Group, Inc. HAIN , with an Earnings ESP of +2.22% and a Zacks Rank #3.
Tyson Foods, Inc. TSN , with an Earnings ESP of +2.70% and a Zacks Rank #2 (Buy).