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The Hershey Company (HSY - Analyst Report) recently reached a 52-week high of $82.69 on Feb 27, 2013 on the back of solid fourth quarter 2012 results and its impressive guidance for fiscal 2013.

Growth Drivers

Hershey’s fourth quarter 2012 adjusted earnings of 74 cents a share rose 5.7% from the prior-year quarter. Earnings, however, missed the Zacks Consensus Estimate by a penny as top-line growth was offset by operating margin declines and rising advertising expenses.

Hershey’s net sales rose 11.7% from the prior-year quarter driven by volume growth, which was boosted by holiday-driven spending.

The company is consistently gaining market share in core U.S. retail channels. Hershey’s U.S. CMG (Candy, Mint, Gum) business, which accounts for over 90% of the U.S retail business, grew significantly in the fourth quarter of 2012.

Hershey’s adjusted gross margin for the quarter expanded 140 basis points (bps) driven by pricing and productivity benefits and improved efficiencies from supply chain initiatives offset headwinds from rising input costs.

The company also discussed several initiatives to drive growth over the long term and aims to be a $10 billion company by 2017.

Hershey maintained its outlook for net sales growth in a range of 5%–7% for the long term. Volume growth of core brands driven by increased promotional efforts and innovation are expected to help Hershey achieve its sales targets.

Gross margins are expected to expand in 2013 by 180–200 basis points as input cost inflation subsides. Productivity gains and costs savings will also boost margins.

The company maintained its adjusted earnings guidance in a range of $3.56–$3.63, which represents growth of 10%–12% year over year.

Investments in core brand marketing, regular product innovation, productivity improvement and moderate commodity cost inflation are expected to help it achieve these targets despite a challenging macroeconomic environment.  

Valuation is Decent

Hershey currently trades at a forward price-to-equity (P/E) of 22.8x, a discount of 14.1% to the peer group average of 26.55x. On a price-to-sales and price-to-book basis, the stock is trading at a premium to the peer group average. However, on a return on equity (ROE) basis, the stock looks attractive. The stock has a trailing12-month ROE of 73.7%, which is above its peer group average of 7.8%.

Hershey carries a Zacks Rank #2 (Buy).

Other companies in the sector that warrant investor attention include Flowers Foods, Inc. (FLO - Snapshot Report), ConAgra Foods, Inc. (CAG - Analyst Report)  and J&J Snack Foods Corp. (JJSF - Snapshot Report), all carrying a Zacks Rank #1 (Strong Buy).
 

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