We currently maintain a Neutral rating on The Hershey Company (HSY), as we expect it to perform in line with the market. The adjusted fourth quarter earnings of $0.61 a share remained in line with the Zacks Consensus Estimate, but was down 3.2% from $0.63 earned in the prior-year quarter.
For the full year 2010, the company reported adjusted earnings of $2.55 a share which was up 17.5% versus 2009. Full year earnings were also in line with Zacks Consensus Estimate.
The Hershey Company is the leading U.S. producer of confectionery products with a domestic market share of approximately 28%. In an effort to increase the potential for profitable growth, management embarked on several programs to divest low-margin brands and implement numerous supply chain cost-reduction initiatives.
One program, dubbed the stock-keeping unit (SKU) rationalization plan, sought to rationalize the product mix through the elimination of 400 non-performing SKUs. The company has restructured the cost base through supply chain improvements. Furthermore, under-performing brands were divested and major price increases were implemented.
Management expects to reduce costs and step up investment in a broad range of products and packaging on a global basis. Management also further rationalized the product portfolio by closing the unprofitable gum business. In order to improve the company’s scale in U.S. and Canada, the company has consolidated support activities in North America and Canada.
With increasing demand for healthier alternatives, management launched products that specifically highlighted health and wellness. For example, dark chocolates help cardiovascular health, control blood sugar and help fight cancer. The company’s household penetration of dark chocolates has increased significantly over the years.
Moreover, the company has also launched various products in the health and wellness category, including Ice Breakers Sours Gum and Ice Breaker Wellness Gum, which contain ingredients such as ginseng, vitamins, and antioxidants.
However, the aggressive competition in the confectionery category is negatively affecting Hershey’s near-term prospects. In addition, the changing consumer habits, in part driven by the low-carb phenomenon, and the growing awareness of healthier snacking options, are also reducing incremental demand for confectionery and other snack products.
Rising commodity prices, especially dairy costs, coupled with aggressive promotional spending will pressure margins and hinder earnings growth. Commodity costs are expected to further increase in 2011. The company manages the impact of volatile commodity and packaging costs through commodity hedging and various price increases.
Although the hedging program mitigates the impact of commodity price increases, dramatic commodity price movements ultimately affect the company’s financials. Also price increases can negatively affect volume in the short term.
The company currently has a Zacks #3 Rank which implies short term Hold rating. On a long-term basis also we maintain a Neutral rating on the stock.
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