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Hershey (HSY) Down on Weak View, Despite Q2 Earnings Beat

Zacks Equity Research

The Hershey Company HSY delivered robust second-quarter 2019 results, with the top and the bottom line beating the Zacks Consensus Estimate and increasing year over year. The quarterly results gained from acquisitions, improved volumes and enhanced margins.

In spite of the sturdy quarterly results, investors’ spirits were dampened by the company’s unimpressive view for 2019. The stock lost nearly 5% in the pre-market trading session on Jul 25. Well, management narrowed down sales expectations from growth in the bracket of 1-3% to a rise of 2%. Also adjusted earnings for the year are projected in the range of $5.68–$5.74, whose mid-point of $5.71 is lower than the current Zacks Consensus Estimate of $5.72.

Earnings & Revenue Discussion

Adjusted earnings per share of $1.31 surpassed the Zacks Consensus Estimate of $1.18 and rose 14.9% year over year. The upside can be attributed to higher sales, lower tax rate and expanded margins. Effective tax rate (on an adjusted basis) contracted 120 basis points (bps) to 14.8% in the quarter.

Consolidated net sales of $1,767.2 million rose 0.9% year over year and surpassed the Zacks Consensus Estimate of $1,763 million. Net price realization and volumes benefited sales growth by 1.2 points and 0.6 points, respectively. However, buyouts and divestitures had an adverse impact of 0.6 points on the top line. Further, currency translations had a 0.3-point adverse impact on sales.

Hershey Company (The) Price, Consensus and EPS Surprise

 

Hershey Company (The) Price, Consensus and EPS Surprise

Hershey Company (The) price-consensus-eps-surprise-chart | Hershey Company (The) Quote

 

Margins in Detail

Adjusted gross profit, which amounted to $821.2 million, increased nearly 5% year on year. Adjusted gross margin expanded 200 bps to 46.5%, primarily supported by 90 bps benefit from favorable mix and fixed costs absorption.

Total advertising and related consumer marketing expenses increased 5.6%. Excluding this, selling, marketing and administrative costs slid 1.4%, courtesy of decline in spending for Margin for Growth initiative and reduced acquisitions costs.

Adjusted operating profit amounted to $370 million, up 9% from the prior-year quarter’s figure. Adjusted operating margin expanded 150 bps to 20.9%, primarily owing to improved gross margin.

Segmental Update

North America (the United States and Canada) net sales inched up 0.5% to $1,568 million, primarily driven by improved pricing. Markedly, pricing boosted the unit’s sales by 1.5 points. However, volumes, net impact of acquisitions and divestitures as well as foreign currency dragged the unit by nearly 0.5 point, 0.3 point and 0.2 point, respectively. Income in the segment rose 6.1% to $470.9 million on the back of favorable gross margin.

Net sales in the International and Other segment rose 3.9% to $199.2 million. Volumes in the unit improved 9.6 points. Divestitures, net price realization and foreign currency made unfavorable impact of 3.2 points, 1.3 points and 1.2 points, respectively. Combined net sales for the company’s focus market that includes Mexico, Brazil, China and India contracted 4%. On a currency-neutral basis, net sales from these markets were up nearly 5%. Segment income came in at $21.9 million in the quarter, up 32% year over year. This was fueled by an improved gross margin and stronger volumes.

Financials

Hershey ended the quarter with cash and cash equivalents of nearly $366 million, long-term debt of $2,888 million and total shareholders’ equity of $1,684 million.

In a separate press release, Hershey declared quarterly dividend payouts of 77.3 cents per share for its common stock and 70.2 cents per share for Class B shares, each reflecting a rise of nearly 7%. This is payable on Sep 16, 2019 to shareholders of record as on Aug 23.

More Details on 2019 Guidance

Hershey updated its outlook for 2019. It now expects net sales to rise 2%, wherein buyouts and divestitures are expected to make nearly 0.5-point positive impact. Currency headwinds are anticipated to be minimal on net sales growth.

Further, Hershey envisions adjusted EPS for 2019 in the range of $5.68–$5.74 compared with the prior guidance of $5.63-$5.74. The revised bottom-line view indicates a rise of 6-7% from the reported figure of 2018.



Price Performance & Zacks Rank

Shares of the company have rallied 19.9% in the past three months compared with the industry’s rise of 17.7%. Currently, Hershey has a Zacks Rank #2 (Buy).

Looking for More Food Stocks? Check These

The J. M. Smucker Company SJM, with a Zacks Rank #2, has long-term earnings growth rate of 4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Campbell Soup Company CPB, with a Zacks Rank #2, has long-term earnings growth rate of 5%.

General Mills, Inc GIS, with an expected long-term earnings growth rate of 7%, also carries a Zacks Rank #2.

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