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Analyst Blog

On Dec 3, we maintained a Neutral recommendation on The Hershey Company (HSY - Analyst Report) following mixed third-quarter results announced on Oct 24.

Why the Neutral Recommendation?

The chocolate giant’s third-quarter 2013 adjusted earnings of $1.04 per share beat the Zacks Consensus Estimate of $1.01 by 2.9%. Earnings also rose 19.5% from the prior-year quarter as solid margins, lower selling and marketing costs and taxes made up for the relatively softer revenue performance in the quarter.

Revenues increased 6.1%, due to sales volume gains. Volumes grew due to market share gains of core brands and new product launches in both the U.S. and international markets.  Sales, however, missed the Zacks Consensus Estimate of $1.88 billion.

Though the third-quarter revenues were slightly soft, management expects sales to pick up in the fourth quarter as confectionery sales peak in the upcoming holiday season.  Management aims to achieve the target on the back of core brand volume growth, innovation, heavy season specific advertising/promotion and merchandising, along with continued momentum in the international markets. However, both advertising and selling/marketing expenses are expected to increase significantly in the fourth quarter, which can put margins under pressure.

Overall, Hershey’s strong brand positioning, strategic marketing investments in core brands as well as disciplined innovation and consumer capabilities make it attractive.

However, 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 increasing 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 #3 (Hold). Other better-ranked food companies are Pinnacle Foods Inc. (PF - Snapshot Report) and Omega Protein Corporation . While Omega Protein sports a Zacks Rank #1 (Strong Buy), Pinnacle Foods carries a Zacks Rank #2 (Buy).

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