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Hershey's Stays Neutral

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On January 7, we maintained a Neutral recommendation on The Hershey Company (HSY - Free Report) , following appraisal of its third quarter results.

The Positives

Hershey’s third quarter 2012 earnings of 87 cents per share beat the Zacks Consensus Estimate by a penny. Also, earnings increased 3.6% from the prior-year quarter, driven by revenue growth and improved gross margins.  Net sales rose 7.5% from the prior-year quarter, driven both by price and volume growth.

We are impressed by the company’s outperformance in all the three quarters of 2012. Moreover, the company upped its earnings guidance for the third time this year, highlighting its attractive earnings potential. The 2013 outlook is also encouraging, especially the expectation of no cost inflation in the year.

In fact, Hershey’s has delivered positive earnings surprises in all the three quarters of 2012. Moreover, following the encouraging outlook for 2013, many analysts raised their estimates for the year. Accordingly, the stock carries a Zacks #2 Rank.

Moreover, the company’s strong brand positioning, strategic marketing investments in core brands, disciplined innovation and consumer capabilities make it attractive.

The Negative

However, Hershey’s lack of presence outside U.S. keeps us on the sidelines. More than 80% of the company’s business is generated in the U.S. In 2011, only around 15% of the company’s net sales were generated outside U.S. The company is accelerating investments in overseas markets, particularly in Mexico, Brazil, India and China. However, competitors like Mondelez International (MDLZ - Free Report) have a significantly stronger presence outside North America.

Other Stocks to Consider

Besides Hershey’s, other stocks in the retail food sector that are currently performing well include Starbucks Corporation (SBUX - Free Report) and General Mills, Inc. (GIS - Free Report) . Both the companies carry Zacks #2 Rank (Buy).

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