Bank Of America Double Upgrades Hershey

Bank of America's bearish stance on Hershey Co HSY dates back to August 2016, but the research firm sees five reasons to turn bullish on the stock.

The Analyst

Bank of America's Bryan Spillane upgraded Hershey from Underperform to Buy with a price target lifted from $92 to $120.

The Thesis

The bullish case for Hershey's stock is based on five key factors, Spillane said in the note. These include:

• 1. A combination of new product launches, marketing initiatives in packaging, expanded capacity of product lines and price increases should result in an acceleration of organic sales growth by 200 basis points in fiscal 2019.
• 2. Margins should improve in fiscal 2019 as the company finalized investments in capabilities and the company will benefit from more favorable commodity and input prices.
• 3. Expectations for $160 million in cost savings in fiscal 2019 should help lift the company's underlying profit by 3 percent.
• 4. Free cash flow should come in at $1.14 billion in fiscal 2019 which can be allocated to improve Hershey's debt/EBITDA to 1.7 times, which is within management's target range of 1.5 to 2.0 times.
• 5. From a historical point of view, Hershey's stock trades at a higher premium versus its peers when the market becomes defensive. Specifically, the premium valuation to its peers has been as high as 70 to 90 percent versus the 18 percent premium today.

Price Action

Shares of Hershey were trading higher by 2 percent at $106.33 early Wednesday morning.

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