Risk-Reward Balanced at Hershey - Analyst Blog
September 13 2012 - 4:30AM
Zacks
We maintained our Neutral
recommendation on The Hershey Company
(HSY)following another impressive performance in the second quarter
of 2012.
Hershey’s second quarter 2012
earnings of 66 cents per share beat the Zacks Consensus Estimate by
8%. Also, earnings increased 17.9% from the prior-year quarter,
driven by revenue growth and improved gross margins. Net
sales rose 6.7% to $1.41 billion from the prior-year quarter,
mainly buoyed by increased pricing. Gross margin expanded 170 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 with the
company’s solid first half performance. The company also upped its
sales and earnings guidance, for the second time this year,
highlighting its attractive earnings potential.
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. These
resulted in consistent growth that continues to outstrip the
company’s long-term targets. 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 than its 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
restrict effects from 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. The company is
gradually accelerating its investments in overseas markets,
particularly in Mexico, Brazil, India and China. Management
believes that the higher growth rates in the emerging and
developing markets will help its international business to account
for 25% of the company’s business over the next five years, up from
the current share of 10%.
However, competitors like
Kraft Foods, Inc. (KFT) have a much more strong
presence outside North America. Kraft Foods’ purchase of Cadbury in
January 2010 has opened new sales channels for the company through
the latter’s vast distribution networks in developing markets such
as 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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