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On Aug 30, we maintained a Neutral recommendation on The Hershey Company (HSY - Analyst Report) 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, (MDLZ - Analyst Report), 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 efforts.

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. (PF - Snapshot Report), carrying a Zacks Rank #1 (Strong Buy).

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