Hershey’s Stock After Earnings: Buy, Wait, Or Stay Away?

With shares of Hershey (NYSE:HSY) now trading slightly below its 52-week high, is HSY a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

C = Catalyst for the Stock’s Movement:

The Hershey Company’s third quarter earnings revealed that customers were still willing to pay for the company’s sweet treats despite being charged higher prices.

For the three month period ended in September, sales volume and market share rose as the company’s new products proved to be successful and its core brands, Hershey’s Kisses and Reese’s Peanut Butter Cups, maintained their popularity. Even though its products were priced on average 3.9 percent higher than last year, due to rising production costs, demand was not substantially affected.

The quarter’s results pushed Hershey to change its full year profit forecast. Citing improved margins and the acquisition of Brookside Foods, the company increased its estimated adjusted earnings growth from 12 percent to 14 percent to 14 percent to 15 percent.

“I’m pleased with our performance given the macroeconomic challenges that consumers and retailers are facing,” said the company’s Chief Executive Officer John Bilbrey on a conference call. “Organic volume trends should continue to improve into the fourth quarter, and our Halloween and holiday seasonal businesses are off to a good start.”

However, the company’s profit fell 10 percent for the quarter. Hershey reported a profit of $176.7 million, or 77 cents a share, which was down from the year-ago profit of $196.7 million, or 86 cents a share.

In comparison, sales rose 7.5 percent to $1.75 billion and, despite volatile commodity prices, the company’s gross margin widened to 42.5 percent from 41.9 percent.

The results beat expectations; analysts polled by Thomson Reuters predicted per-share earnings of 86 cents, and the chocolate maker posted third-quarter earnings of 87 cents per share.

Following the earnings release on October 25, Zacks reaffirmed its Neutral Rating on the stock, and shares in the company closed at $69.85, slightly below its opening price of $70.59.

H = High Quality Pipeline:

The Hershey Company is the largest quality chocolate producer in North America. This year, in order to stimulate growth, the company has crafted a five-year plan targeting net sales growth of 5 to 7 percent and earnings growth of 8 to 10 percent. The plan involves investing in and expanding the company’s core brands, including Hershey’s Kisses, Reese’s, Jolly Rancher and Ice Breaker. By 2017, its net sales goal is $10 billion.

Industry stats back this growth potential. The company is a market leader; Hershey holds a 42.9 percent market share in the U.S. chocolate confectionery market and a 28.9 percent share in the non-chocolate market. Its operations have also expanded internationally. In the last four years, the confectionery markets of China, Brazil, and India grew, on average, by 7.4 percent, 12.5 percent, 22.7 percent, respectively.

E = Excellent Relative Performance to Peers:

Many investors favor Return on Equity as a key metric to how well the company is operating. Hershey’s operational performance is far better than its peers. HSY has an ROE of 63 percent while rival Kellogg Company (NYSE:K) comes in second at 51 percent and General Mills (NYSE:GIS) has an ROE of 22 percent.

Furthermore, the company has a debt-to-equity of 180 percent, which is greater than the industry average. This number, however, has decreased since 2007, when its debt-to-equity ratio was 360 percent.

Based on the company’s long-term expected growth rates and the strength of its brands in the United State chocolate market, Hershey has upside domestically. Even difficult macroeconomic conditions, which Bilbrey pointed out during the conference call, did not cause sales to decline.  However, while noting the company’s strong brand positioning, strategic marketing investments in core brands, and disciplined innovation, Zacks kept its Neutral recommendation on the stock because the company still lacks a significant presence outside the United States.

Hershey looks like a WAIT AND SEE until we can establish some evidence the new plan is working.

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