Hershey Retained at Neutral - Analyst Blog
May 31 2012 - 10:30AM
Zacks
We have maintained a Neutral rating on The Hershey
Company (HSY) following an impressive performance in the
first quarter of 2012.
Hershey reported first quarter 2012 earnings of 96 cents, way
above the Zacks Consensus Estimate of 81 cents. Also, earnings
jumped 31.5% from the prior-year quarter, driven by solid revenues
and improved margins despite rising input costs and a difficult
macro-economic environment. Net sales rose 10.7% from the
prior-year quarter, mainly buoyed by increased pricing. Gross
margin expanded 180 basis points as pricing and productivity
benefits and improved efficiencies from the company’s supply chain
initiatives offset headwinds from rising input costs. We are
impressed by the company’s solid first quarter performance. The
company also upped its guidance for fiscal 2012.
Moreover, the company’s strong brand positioning, strategic
investments in core brands, disciplined innovation, and consumer
capabilities make it attractive.
Hershey is the largest producer of quality chocolate in North
America and markets some of the world’s leading brands which enjoy
widespread consumer acceptance. The company is also a global leader
in chocolate and sugar confectionery products, which is an
attractive category as confectionery products are easily available,
affordable and highly indulgent, thus making it almost recession
resistant. The company is well known for chocolates 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.
Hershey invests in core brand marketing, continuously launches
new products and conducts advertising and promotional campaigns to
stimulate sales. This has resulted in consistent growth that
continues to outstrip the company’s long-term targets established
in 2008. The company invests in advertising and marketing
capabilities to build its brands globally and monitors the
performance of its brands. The company’s strong brand investments
give it a competitive advantage and are one of the principal
reasons behind the company witnessing better volume elasticity and
margin gains versus peers.
In an effort to boost long-term growth, management has embarked
on several programs to divest low-margin brands, improve supply
chain efficiencies and implement cost-reduction initiatives. These
strategies have helped to keep at bay rising input costs and expand
margins.
However, more than 80% of the company’s business is generated in
the U.S. In 2011, only around 15% of net sales were generated
outside U.S. In January 2010, Hershey’s competitor, Kraft
Foods, Inc. (KFT), purchased Cadbury. This strategic
acquisition opened up new sales channels for the company through
the latter’s vast distribution networks in the developing markets
of India, Brazil and Mexico. Kraft Foods’ solid presence outside
U.S. has hurt Hershey’s international prospects significantly.
Higher ingredient costs and a lack of significant presence outside
U.S. keep us on the sidelines.
HERSHEY CO/THE (HSY): Free Stock Analysis Report
KRAFT FOODS INC (KFT): Free Stock Analysis Report
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