A Great Quarter for the U.S. Chocolate King

Hershey  (NYSE: HSY  ) reported third-quarter results on Oct. 24. It showed growth on both the top and bottom lines. However, revenue was slightly below analyst estimates and the stock got hit in the trading day. Let's take a look to see whether this is a buying opportunity or whether we should put Hershey in the penalty box until the next quarter's results are released.

Confection perfection
Hershey is one of the largest producers of chocolate and confectionery products, candy, and gum in the world. It is home to over 80 brands which include Hershey's, Reese's, Kit Kat, Twizzlers, Jolly Rancher, and Ice Breakers. The company is also releasing a new product in January that will be the first new brand introduced by Hershey in 30 years, a line of caramel chews under the brand name Lancaster.

Pre-Halloween report
Hershey's third-quarter earnings for fiscal 2013 proved to be a mixed bag:

Metric Reported Expected
Earnings per Share $1.04 $1.01
Revenue $1.85 billion $1.88 billion

Earnings per share grew 19.5% and revenue rose 6.1% year over year. Gross margin expanded an impressive 300 basis points to 46.2%. Management also reaffirmed its full-year outlook and cited core brand performance and new products as drivers for fourth-quarter growth and growth going forward. After going through the report, one would think it was rock-solid. Analyst expectations caused investors to react differently.

The reaction
Although the aforementioned report contained stellar results and comments, the company narrowly missed consensus revenue expectations. The stock took a 2.34% haircut in the first few hours of trading before rebounding and falling just 0.45% on the day. It seems clear that investors initially overreacted before realizing the quarter was not that bad and piling back in. I believe any weakness in Hershey is a buying opportunity because of its great portfolio of brands and its expansion efforts worldwide.

Stock Price:

Source: Yahoo! Finance.

2013 in review
In the nine months ended Sept. 29, Hershey widely outperformed its 2012 results. Take a look at the numbers:

  • Diluted earnings per share up 14.4% to $2.86.
  • Revenue rose 6.07% to $5.19 billion.
  • Gross profit increased 12.7% to $2.43 billion.
  • Gross margin grew 280 basis points to 46.8%.
  • Dividends paid totaled $1.81 in 2013 compared to $1.56 in 2012.
The earnings report showed that Hershey has grown significantly, both year over year in the third quarter and year to date in the nine months ended Sept. 29. The key financial statistics are moving in the right direction. Its dividend is on the rise as well. In fact, Hershey has paid a dividend for 336 consecutive quarters, which includes four straight years of dividend increases. I believe Hershey will continue to grow on the top and bottom lines for the next several years. As this happens, the company will continue to increase its dividend and initiate share repurchases to return additional value to shareholders.
 

Update on the competition

On Oct.r 1, I took a look at two of Hershey's top competitors, Mondelez International (NASDAQ: MDLZ  ) and Tootsie Roll Industries (NYSE: TR  ) . As mentioned in the article, Mondelez owns many chocolate brands such as Cadbury, Cote d'Or, and Suchard, while Tootsie Roll is home to several candy brands such as the Tootsie Roll, Tootsie Pops, and Blow Pops. In this article, we concluded that Hershey was the best pure play on the American chocolate market and Mondelez came in second, but that we should stay away from Tootsie Roll for now. Let's take a look at the performance of each of these stocks since Oct. 1:

Company Share price increase since Oct. 1
Hershey  4.14%
Mondelez International  7.78%
Tootsie Roll Industries  3.05%

Hershey and Mondelez have outperformed the S&P 500's 3.43% increase, while Tootsie Roll has narrowly underperformed. I still believe Hershey is the top play of all confectioners because of its brand strength, new products coming to the market in 2014, and expansion in China. However, Mondelez has a great product mix as well and positive forward estimates, so if you want snack food exposure on top of chocolates and candies, then look no further. I would continue to avoid Tootsie Roll because its growth has slowed mightily over the last few quarters and management has done nothing to make investors bullish.

The Foolish bottom line
Hershey is an American titan set to grow at a consistent rate over the next several years. It has a core brand portfolio that other companies envy and new products coming to the market in 2014. Its forward estimates are positive and the company has a healthy 2% dividend to boot. Any weakness shown in the stock over the next few trading days is a buying opportunity, and buying is what I plan on doing.

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  • Report this Comment On October 28, 2013, at 9:46 AM, ScoopHoop wrote:

    Great company. I started buying at 57 per share and continued buying all the way up to 89 per share. I love candy companies. I used to own Wrigley, my best stock ever until Mars bought the company.

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