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Will Hershey Beat Earnings in 1Q13?

Zacks Equity Research

Chocolate maker,The Hershey Company (HSY) is set to report its first-quarter 2013 results on Apr 25 before the market opens. Last quarter it posted a 1.33% negative surprise. Let’s see how things are shaping up for this announcement.

Growth Factors this Past Quarter

We believe that the earnings miss in the quarter was due to operating margin declines and rising advertising expenses. Earnings however, rose more than 5% year over year.  Revenues grew year-over-year and also beat the Zacks Consensus Estimate driven by improving volume trends of core brands in the U.S. on the back of increased advertising investments and consumer promotions and innovation. Pricing as well as the Jan 2012 acquisition of Canadian confectionary company, Brookside Foods, also benefited revenues. Operating margin however, suffered due to higher advertising and selling, marketing and administrative expenses.

Earnings Whispers?

Our proven model does not conclusively show that Hershey is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP (Read: Zacks Earnings ESP: A Better Method) and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Negative Zacks ESP:  The Earnings ESP is -1.92%.

Zacks Rank #3 (Hold):  Hershey’s Zacks Rank #3 (Hold) lowers the predictive power of ESP because the Zacks Rank #3 when combined with a negative ESP makes surprise prediction difficult. We caution against stocks with Zacks Ranks #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

The first quarter revenues are expected to face strong year-ago comparisons due to a shorter Easter season in 2013 in the U.S. versus last year. Moreover, the company expects operating margin to be pressured in the first half due to increased marketing and promotional efforts and higher costs to support the launch of Brookside branded and international new products.

Other Stocks to Consider

Here are some other consumer staples companies you may want to consider, as our model shows they have the right combination of elements to post an earnings beat this quarter:

Flower Foods Inc. (FLO), with Earnings ESP of +4.88% and a Zacks Rank #1 (Strong Buy)

Kraft Foods Group, Inc. (KRFT), with Earnings ESP of +3.13% and a Zacks Rank #2 (Buy)

Church & Dwight Co. Inc. (CHD), with Earnings ESP of +1.39% and a Zacks Rank #3 (Hold)

Read the Full Research Report on HSY

Read the Full Research Report on CHD

Read the Full Research Report on FLO

Read the Full Research Report on KRFT

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