The Hershey Company

by Zacks Equity Research

September 24, 2012 |

The Hershey Company (HSY - Free Report) raised its 2012 earnings guidance after a solid first-half performance. Shares reached a new 52-week high on September 7 and earnings estimates have been moving up. Moreover, the company pays a regular quarterly dividend that yields 2.7%, which makes this Zacks #2 Rank (Buy) chocolate maker attractive to income seeking investors.

Solid Second Quarter Results

Hershey’s second quarter 2012 earnings of 66 cents per share surpassed the Zacks Consensus Estimate by 8%. Over the past 10 quarters, the company has now beaten six times and matched four. Earnings in the quarter also increased 17.9% year over year, driven by revenue growth and improved gross margins.

Net sales rose 6.7% to $1.41 billion from last year, mainly buoyed by increased pricing.

Hershey’s adjusted gross margin for the quarter expanded 170 basis points to 44.8%, as pricing and productivity benefits and improved efficiencies from supply-chain initiatives offset headwinds from rising input costs.

Outlook Enhanced

Following the solid first half performance, Hershey raised its 2012 earnings guidance to between $3.17 and $3.23 per share, compared to the prior forecast of $3.11 to $3.17. Accordingly, adjusted earnings per share are expected to grow 12% to 14% year over year, versus the prior expectation of 10% to 12%. The revenue guidance was maintained at 7%-9% growth over 2011 levels.

At its investor day in June 2012, Hershey raised its long-term targets following its continued earnings upside. Over the long term, Hershey expects organic sales to grow between 5% and 7% (3%-5% previously) and adjusted earnings per share to increase 8% to 10% (6%-8% previously). The company aims to achieve $10 billion in net sales by 2017.

Increasing Dividend Payout

In addition to impressive earnings growth, Hershey pays a regular quarterly dividend of 38 cents per share, representing an annual dividend yield of 2.1%. The company has been raising the payout every year since 2010, including a 10% increase earlier this year.

Rising Earnings Estimates

The Zacks Consensus Estimate for 2012 has increased 1.3% over the last 60 days to $3.23 per share, implying year-over-year growth of 14.7%. For 2013, the Zacks Consensus Estimate rose by almost 1% in the same time frame to $3.57 per share, reflecting year-over-year growth of 10.4%.

Attractive Valuation

Hershey currently trades at a forward price-to-equity (P/E) of 22.25x, in line with the peer group average. Also on a price-to-sales basis the stock is trading in line with the peer group average of 2.57x. However, the company has a trailing 12-month return on equity (ROE) of 76.3%, which is significantly above its peer group average of 6.7%.

Chart Echoing Consistent Rise

Shares of Hershey have been rising consistently since mid-April 2012 following back to back solid quarterly results and a subsequent increase in guidance. Hershey’s shares reached a new 52-week high of $73.42 on September 7, the same day it announced its intention of buying the remaining stake in its India-based joint venture Godrej Hershey from partner Godrej Industries Ltd. After completion of the transaction, Godrej Hershey will become Hershey’s wholly-owned subsidiary and will be known as Hershey India.

Moreover, the stock is currently trading above its 200-day moving average, which stands at $65.07. In fact, the stock has been consistently trading above its 200-day moving average since the end of November 2011.

Volume is strong, averaging roughly 786K daily. Hershey has outperformed the S&P 500 over the past six months. The year-to-date return for the stock is 16.44% compared with the S&P 500’s return of 16.10%.

Armed with strong brand positioning, strategic marketing investments in core brands, disciplined innovation, consistently rising estimates and a smart dividend yield, Hershey offers investors considerable upside potential.

Founded in 1893 and based in Hershey, Pennsylvania, Hershey is one of the largest U.S. confectionery companies and is well known for chocolate products like Hershey’s, Reese’s, and Kisses, as well as non-chocolate confectioneries such as Jolly Rancher candy, Ice Breakers chewing gum, Breath Savers mints, and Bubble Yum bubble gum. In addition, Hershey also manufactures pantry baking ingredients, toppings and beverages; and gum and mint refreshment products. Currently, the company has a market cap of $16.07 billion.

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