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Hershey Kept at Neutral

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On Jun 25, we maintained a Neutral recommendation on The Hershey Company (HSY - Free Report) , despite solid first-quarter results as we await substantial visibility on its outside U.S. expansion efforts.

Why the Neutral Recommendation?

The chocolate giant’s first-quarter 2013 (results announced on Apr 25) earnings of $1.09 per share beat the Zacks Consensus Estimate by 4.8%. Earnings also rose 13.5% from the prior-year quarter driven by decent top-line growth and solid margins. Revenues increased 5.5% driven by improving volume trends and market share gains of core brands in the U.S. and the launch of Brookside branded products.  Hershey’s adjusted gross margin for the quarter expanded 240 basis points driven by lower input costs, pricing and productivity benefits and improved efficiencies from supply chain initiatives.

Moreover, Hershey raised its full year 2013 earnings outlook as it expects to gain mainly from new products, international expansion and lower input costs and other cost savings. The company however, maintained its outlook for net sales growth which is expected to be within its long-term targets of 5% – 7% (including foreign exchange impact). Volume growth of core brands in the U.S. and the expansion of five core brands in international markets driven by increased investments in advertising and go-to-market capabilities are expected to help Hershey achieve its sales targets. Apart from these, increased innovation such as Kit Kat Minis, Twizzlers Bites and Jolly Ranchers Bites; and a broader launch of Brookside brand products in the food, drug and mass channels will also benefit sales growth.

Following the solid first-quarter results and the upbeat outlook for the year, the Zacks Consensus Estimates mostly moved upwards. The Zacks Consensus Estimate for both 2013 and 2014 increased by around 1% over the last 90 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 - Free 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 stocks in the food business that are currently doing well and are worth considering include Flower Foods Inc. (FLO - Free Report) and B&G Foods Inc. (BGS - Free Report) , both carrying a Zacks Rank #1 (Strong Buy).

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