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Hershey Kept at Neutral

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On Mar 15, we maintained a Neutral recommendation on The Hershey Company (HSY - Free Report) , following mixed fourth-quarter results announced on Jan 31.

Why the Neutral Recommendation?

Hershey’s fourth-quarter 2012 earnings of 74 cents per share missed the Zacks Consensus Estimate by a penny.  Top-line growth was offset by rising advertising expenses, thus causing the earnings miss. Earnings, however, rose 5.7% from the prior-year quarter. Net sales also rose 11.7% to $1.75 from the prior-year quarter, driven largely by core brand volume growth in the U.S.

Despite the earnings miss, Hershey raised its full-year 2013 earnings outlook as it expects to gain from increased investments behind advertising and consumer promotions and lower input costs and other cost savings.

We are impressed by the HSY’s strong performance in all the quarters of 2012. Hershey upped its earnings guidance in all the quarters of 2012, highlighting its attractive earnings potential. Hershey seems to be poised well for the next quarter as well with Earnings Expected Surprise Prediction (ESP) (Read: Zacks Earnings ESP: A Better Method) standing at +4.76%.

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

Despite Hershey missing estimate in the fourth quarter, future estimates have been mostly revised upwards following the increase in the earnings guidance for 2013. The Zacks Consensus Estimate for 2013 rose 1% to 3.63 cents while that for 2014 increased 0.3% to $3.99 in the past 60 days. Accordingly, the stock carries a Zacks Rank #2.

However, Hershey’s lack of presence outside the U.S. keeps us on the sidelines. 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.

Hershey 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, other stocks in the retail food sector that are currently performing well include ConAgra Foods, Inc (CAG - Free Report) and Kellogg Company (K - Free Report) . Both the companies carry a Zacks Rank #2 (Buy).

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