KFT Mondelez International, Inc. (MM)

In order to strengthen its position in the emerging markets, The Hershey Company (HSY) recently agreed to acquire the remaining 49% stake in Godrej Hershey Ltd. from Godrej Industries Ltd. and another small shareholder. The Hershey Company already holds 51% stake in Godrej Hershey.

Godrej Hershey was formed as a result of a joint venture between The Hershey Company (USA) and Godrej Group in 2007. The company has several well known brands in its portfolio like Hershey, Mahalacto, Nutrine, Jumpin & Sofit. Godrej Hershey operates in several categories such as confectionery, beverages and grocery items. However, Godrej Hershey has been running at a loss and has incurred $47.6 million in debt.

According to the agreement, Hershey will own all the brands of Godrej Hershey, like MahaLacto, Nutrine candy, Jumpin and Sofit, along with its manufacturing facilities. The company will also assume $47.6 million in debt. The transaction is expected to be completed by the end of the third quarter of 2012. After the completion of the process, the new wholly-owned subsidiary of The Hershey Company will be known as Hershey India.

With this acquisition, Hershey will be able to integrate Godrej Hershey into its global business and will be able to use its expertise to enhance growth. The company intends to offer greater support in terms of brand building, product innovation and infrastructure in order to drive growth in the Indian Market.

India is one of the fastest growing markets with a large consumer base and increasing consumer spending. With the growing numbers in the middle income group, India has a huge potential for growth in the confectionery and beverage market.

Hershey, as a global leader in the chocolate and sugar confectionery market, will be able to capitalize on this opportunity by making the necessary investments. Also, the company will be able to compete with other global chocolate and sugar confectionery leaders like Kraft Foods Inc. (KFT), who have been focusing on expansion in these emerging markets.

Hershey posted a strong second quarter performance, with its earnings of $0.66 per share beating the Zacks Consensus Estimate by 8%. Also, earnings increased 17.9% from the prior-year quarter, driven by revenue growth and improved gross margins.

For fiscal 2012, Hershey expects to record adjusted earnings in the range of $3.17–$3.23 per share, up from the prior forecast of $3.11–$3.17 per share on improved gross margins. The Zacks Consensus Estimate of $3.23 is at the upper end of the guided range.

We are impressed by the company’s solid first half performance and its strong brand positioning, strategic marketing investments in core brands and disciplined innovation. However, higher ingredient costs and lack of significant presence outside the U.S. keep us on the sidelines. We currently have a Neutral recommendation on The Hershey Company. The stock carries a Zacks #2 Rank (a short-term Buy rating).

 
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