Hershey's Earnings: Sweet Treat Or Sour Candy?

Hershey Co HSY reported mixed third-quarter results and lifted part of its full-year outlook.

The Analysts

BMO Capital Markets analyst Kenneth Zaslow maintained a Market Perform rating on Hershey stock with a price target lifted from $133 to $138.

Bank of America Merrill Lynch analyst Bryan Spillane maintained a Buy rating with an unchanged $165 price target.

BMO: 'Steady' Report, Valuation Concerns

Hershey reported a 1-cent EPS beat in the third quarter at $1.61, along with a stronger-than-expected sales and operating profit, Zaslow said in a Friday note.

Organic growth moderated to slightly more than 1.5% due to softer volume growth, the analyst said. 

The earnings report showed that the company's candy, mint and gum retail takeaway accelerated from 2% last quarter to 2.2% as Hershey gained market share, he said.

Momentum came from strong performance in Reese's, distribution gains, innovation and packaging, Zaslow said. 

Gross margins expanded 80 basis points in the quarter, which was better than Hershey's own projections, the analyst said. 

This was due to favorable commodity prices and higher price realization, which more than offset incremental logistics costs, he said. 

The company reported an overall "steady" earnings report, and Hershey is in a good position to mitigate any earnings volatility over the coming year, Zaslow said.

Yet the stock is trading at its highest valuation levels since 2004 and it is difficult to justify buying at current levels, according to BMO. 

BofA: Growth To Continue Next Year

The main highlight from Hershey's report is confirmation the company is seeing growth from the investments it's making, Spillane said in a Friday note.

Looking forward to fiscal 2020, this momentum is likely to continue for the following reasons, the analyst said:

• A July price increase could start to positively impact financial results in the first quarter.
• The company will lap a 1-point SKU rationalization headwind and a 0.5-point longer Easter tailwind.
• Gross margin leverage should continue, although at a smaller magnitude.
• Hershey is likely to re-invest gross margin leverage back into major brands as well as smaller brands like Almond Joy.
• Expectations are for the ONE Brands acquisition to be slightly accretive, with potential synergies from supply chain efficiencies.

BofA's $165 price target is based on 27 times the fiscal 2020 EPS estimate, which is a premium to Hershey's peers at 16 times.

The premium multiple is justified, as strategic actions and initiatives taken last year will likely translate to improved growth and earnings in 2020, Spillane said. 

Price Action

Hershey shares were down 1.26% at $144.53 at the time of publication Friday. Mondelez MDLZ, a peer in the candy sector, reports earnings next Tuesday.

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