Hershey Grows Cocoa with Ecom

The Hershey Company (HSY - Analyst Report) along with cocoa supplier, Agroindustrias Unidas de Cacao SA de CV ‘AMCO,’ a member of the Ecom Cocoa Group, have initiated a $2.8 million Mexico Cocoa Project to restore the struggling Southern Mexican cocoa farming industry and to ensure a proper supply of cocoa in the future.

For years, cocoa farming in Mexico has suffered due to Moniliasis, or frosty pod rot. It is an infection that attacks the cocoa pods and damages its cocoa beans. The Mexico Cocoa Project is a 10-year program which intends to help more than 1000 cocoa farmers.

The program has been designed to control the damage incurred due to Moniliasis. Hershey and Ecom will work with the Mexican government institutions and a local NGO in this project. The program will build nurseries and use expert knowledge to develop disease resistant cocoa trees. The farmers will be trained on farm renovation.

Further, they will be given disease resistant cocoa trees to be re-planted in 1000 hectares of land. The program intends to ensure steady global supply of cocoa which would eventually lead to a better livelihood for the farmers.

The Mexico Cocoa project is one of Hershey’s several initiatives to ensure smooth supply of cocoa in the long term. Rising prices and ensuring stable supply of cocoa are matters of concern for the company.

The company needs to secure its future supply of cocoa in order to maintain its brand name and profitability in the long run. Ecom Cocoa Group is one of the largest providers of coffee and cocoa in the world. Hersheys’s collaboration with Ecom in the Mexico Cocoa Project will ensure steady supply of cocoa in the long run.

For 2012, the company expects adjusted earnings to be in the range of $3.11–$3.17 per share. The adjusted earnings per share are expected to grow in the range of 10–12% year over year compared to previous expectations of 9–11%. The Zacks Consensus Estimate is 61 cents for the second quarter of 2012, and $3.21 for the FY2012.

We appreciate the company’s investment in brand building and product innovation, which eventually will lead to consistent growth in the long term. However, on the flip side, increasing advertising expenses and rising cost of input commodity, particularly cocoa, milk and fuel can have a negative impact on margins of the company.

The Hershey Company carries a Zacks #2 Rank in the near term (Buy rating).

Based in Hershey, Pennsylvania, The Hershey Company is the largest producer of chocolates in North America. The company also produces sugar confectionary. The company offers more than 25 brands including Hershey's, Hershey's Kisses, Hershey's Bliss, Hershey's Special Dark and Kit Kat.