Hershey: Good Results But Low Expectations

Hershey, the largest chocolate manufacturer in North America, has published quarterly results very well received by the investors.

Leeson. 16/11/2016

Its third-quarter fiscal revenues rose more than 2%, surpassing the mark of $2 billion. Meanwhile, net result has produced a much more spectacular advance of 45% to $227 million. In any case, this improvement was due largely to falling negative extraordinary results. Disregarding this effect, the increase in profit would be 8%, still above the increase in revenues.

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The company is consolidating its growth in Latin America

Investors have applauded the improvement, especially the operating profit, even though -as we mentioned- much of the improvement was because last year the company recorded a depreciation of the value of its Chinese assets by $300 million. Revenues show signs of strength after its growth rate fell for four consecutive quarters, to the point of suffering a decline of 4% in the first quarter of this year. It also highlights the drop in inventories, which are below its historical average, reducing costs.

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The great pending issue of the group is precisely the international expansion

By region, the company is consolidating its growth in Latin America, with double-digit growth rates in major markets -such as Mexico and Brazil-, which serve to offset the modest growth in the US (less than 2%). The only concern for the company was India, although the decline in that country (-20%) was due solely to the temporary interruption of production. In any case, the great pending issue of the group is precisely the international expansion. Despite its potentially very positive growth in several markets, the fact is that the contribution of its international business is less than 12% of its total revenue, nearly three points lower than just two years ago. In addition, this international business has so far a negative impact on the group’s profitability.

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Hershey does not seem to arouse the enthusiasm of analysts.

Generally, we can say that growth expectations are not too optimistic. Revenues show remarkable strength, which is positive, but does not have a future catalyst that allows thinking of more significant progress. The company is very profitable because it is able to maintain very solvents margins, but without revenue´s growth the path is difficult to sustain. Its EV/Sales ratio is over 4x, well above the industry average. Also its PER, 26.5x, is above the average. That is, it is trading at a premium compared to the industry. Currently, it trades over $100 per share, with a market value of $20 billion. Hershey does not seem to arouse the enthusiasm of analysts.

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The company is very profitable because it is able to maintain very solvents margins

The average recommendation of the analysts who analyses the value is “Hold” with a target price of $105, virtually its current stock price. Moreover, forecasts regarding the results of these same experts have continued to worsen over the past 15 months.

Disclosure: The Luxonomist is not responsible for the views expressed in the article. The text has been written freely expressing their own ideas, without receiving any compensation. The author has no business relationship with any of the companies whose shares are listed in this article.

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