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Hershey (HSY) Looks Promising on Pricing & Prudent Buyouts

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The Hershey Company (HSY - Free Report) is well-poised for growth, courtesy of its focus on prudent buyouts and innovation to augment its brand portfolio. The leading snacks company’s strategic pricing efforts look promising.

Let’s discuss this in detail.

Impressive Performance & Outlook

Higher prices and contributions from the buyouts drove Hershey’s fourth-quarter 2021 results, with the top and the bottom line surpassing the Zacks Consensus Estimate and improving year over year. Adjusted earnings of $1.69 increased 13.4%, while consolidated net sales of $2,326.1 million rose 6.4%. The buyouts of Pretzels, Dot's and Lily's, and foreign exchange benefited net sales by 2.2 points and 0.2 points, respectively.

Hershey exited 2021 on a solid note, and the momentum continued into 2022. In its last earnings call, management highlighted that it anticipates solid seasonal performance driven by increased consumer engagement and record level sell-throughs in 2022. The company is optimistic about its innovation for 2022. Management envisions 2022 net sales growth in the band of 8-10% for 2022 with 3-4 point benefit from the Dot’s, Pretzel’s and Lily’s acquisition. Net sales are likely to be backed by higher list prices across all the segments. Hershey expects adjusted earnings per share (EPS) to increase 9-11% for the year, while reported EPS growth is likely to be 7-10%.

Zacks Investment Research
Image Source: Zacks Investment Research

Pricing: A Key Catalyst

Hershey is undertaking strategic pricing initiatives to improve its performance. Net price realization drove Hershey’s fourth-quarter 2021 top line by 6.1 points, courtesy of higher list prices at all segments and slightly lower levels of promotional activity compared with the prior year’s levels. In the North America Confectionery segment, price realization contributed 4.3 points to growth. In the North America Salty Snacks segment, price realization contributed 15.9 points to the upside. Across the International segment, price realization contributed 19.7 points to sales.

Strategic Acquisitions Contributing to Growth

Hershey has been undertaking buyouts to augment portfolio strength and boost revenues. In December 2021, Hershey acquired Dot’s Pretzels LLC — the owner of Dot’s Homestyle Pretzels, a leading brand in the pretzel category. The addition of Dot’s Pretzels is a perfect match for Hershey’s growing salty snacking portfolio. The company purchased Pretzels Inc. from an affiliate of Peak Rock Capital. The acquisition expands Hershey’s snacking and production capabilities. On its last earnings call, management highlighted that Dot’s increased more than 55% in 2021 on distribution and velocity gains. On Jun 25, 2021, Hershey concluded the acquisition of Lily's, a leading better-for-you (BFY) confectionery brand. The buyout is in sync with Hershey’s focus on creating an impressive BFY confection portfolio as part of its multi-pronged better-for-you snacking strategy.

Apart from such prudent buyouts, Hershey is investing in capacity expansion. In fourth-quarter 2021, management highlighted that in the last two years, it brought four new manufacturing lines online. In addition, the company added a new distribution center with state-of-the-art technology and enhanced agility. Management is on track with several additional capacity expansion initiatives associated with North American Confectionery.

We believe that such expansion efforts, along with the aforementioned upsides, are likely to sustain Hershey’s performance. The Zacks Rank #2 (Buy) company’s stock has gained 24.7% in the past six months compared with the industry’s rally of 21.1%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other Solid Food Bets

Some other top ranked-ranked stocks are Sanderson Farms, Inc. , Flowers Foods (FLO - Free Report) and Pilgrim’s Pride (PPC - Free Report) .

Sanderson Farms, the producer of fresh, frozen and minimally-prepared chicken, currently sports a Zacks Rank #1. Shares of SAFM have dropped 3.4% in the past six months.

The Zacks Consensus Estimate for Sanderson Farms’ current financial year sales and EPS suggests growth of 18% and 56.1%, respectively, from the year-ago reported number. SAFM has a trailing four-quarter earnings surprise of 46.8%, on average.

Flowers Foods, the producer and marketer of packaged bakery products, currently carries a Zacks Rank #2. Shares of Flowers Foods have increased 5.3% in the past six months.

The Zacks Consensus Estimate for Flowers Foods’ current financial year sales and EPS suggests growth of 7.2% and 4%, respectively, from the year-ago reported figure. FLO has a trailing four-quarter earnings surprise of 9%, on average.

Pilgrim’s Pride, which produces, processes, markets and distributes fresh, frozen, and value-added chicken and pork products, carries a Zacks Rank #2. Shares of Pilgrim’s Pride have declined 19.2% in the past six months.

The Zacks Consensus Estimate for Pilgrim’s Pride’s current financial year EPS suggests growth of 19.7% from the year-ago reported number. PPC has a trailing four-quarter earnings surprise of 24.9%, on average.


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