Could Sweet First-Quarter Results Send Hershey Back to Its Highs?

Hershey is set to release its first-quarter results, so let's see if we should buy the chocolate giant right now.

Apr 14, 2014 at 11:15AM

The Hershey Company (NYSE:HSY) is arguably the most popular chocolate and candy producer in the world, and it has watched its stock price more than double since the market lows of 2009. Earnings have played a key role in the stock's rise, and the company has scheduled its first-quarter results for release on April 24. Let's break down the most recent earnings release and the expectations for the upcoming report, and take a look at one of the company's largest competitors, Mondelez International (NASDAQ:MDLZ), to decide if we should be buying right now or if we should wait to see what the quarter holds.

Images

Source: Hershey.

The last time out
On Jan. 30, Hershey released its fourth-quarter report to complete fiscal 2013; here's a breakdown and a year-over-year comparison of the results:

MetricReportedExpected
Earnings per Share $0.86 $0.86
Revenue $1.96 billion $1.89 billion

Source: Benzinga

Images

Source: Hershey's Facebook

Hershey's earnings per share increased 16.2% and revenue increased 11.7% from the year-ago period, driven by a "solid holiday season" in North America. Gross profit increased 13.7% to $857.4 million and the gross margin showed strength, expanding 70 basis points to 43.8%. Although these are all great statistics, the highlight of the quarter came when the company provided updated market share data; here's what Hershey's President and Chief Executive Officer, John P. Bilbrey, said:

Hershey reclaimed its CMG [candy, mint, and gum] category leadership position in the U.S. with a 31.1 percent share of the market. Additionally, our China business reached a milestone 10.2 percent share of the chocolate market and, in Canada, our combined candy and mint segments became the category leader in that marketplace.

This strong performance resulted directly from Hershey's growth initiatives and ongoing product innovation, and management noted that it expects new product launches to keep the company's growth on an upward trend. Overall, it was a great quarter for Hershey, and its stock reacted by rising 2.62% on the day of the release and proceeded to rally another 9% afterward, but it has since fallen drastically as a result of an analyst downgrade and volatility in the market.

Expectations and what to watch for
Hershey's first-quarter results are due out before the market opens on April 24; here's what analysts currently expect to see:

MetricExpectedYear-Ago
Earnings per Share $1.16 $1.09
Revenue $1.92 billion $1.83 billion

Source: Estimize.

Images

Source: Hershey'.

These expectations call for Hershey's earnings per share to increase 6.4% and revenue to rise 4.9% year over year. Key metrics aside, Foolish investors will want to watch for three statistics and updates in the report:

  1. It will be very important for Hershey to provide guidance for the second quarter that is within analysts' expected range; currently, estimates call for earnings per share of $0.82 and revenue of $1.60 billion, which would represent growth of 13.9% and 6%, respectively, compared to the year-ago period.
  2. While it provides its second-quarter outlook, it will also be important for Hershey to reaffirm its outlook on fiscal 2014. In the fourth-quarter report, the company said it expected earnings per share in the range of $4.05-$4.13, an increase of 9%-11%, and revenue growth of 5%-7% from fiscal 2013.
  3. Watch for updated information or revenue projections for Hershey's new products and its expansion of current products into new markets. The year of 2014 is a huge year for the company in terms of innovation and expansion, so it will be important to make sure that the process is running smoothly. 
I believe Hershey will meet or exceed analyst estimates while satisfying these three elements, which will help push the stock back toward its previous highs; for these reasons, I would be a buyer on any continued weakness going into the earnings release.

Huge competitor's results due out two weeks later
Mondelez International, the company behind competing chocolate brands such as Cadbury, Suchard, Milka, and Cote d'Or, will release its quarterly results two weeks after Hershey's, on May 7; here's what analysts currently expect the report will hold:

MetricExpectedYear-Ago
Earnings per Share $0.33 $0.34
Revenue $8.66 billion $8.74 billion

Source: Estimize

Screen Shot

Source: Cadbury.

These estimates would result in Mondelez's earnings per share declining 2.9% and revenue falling 1% year over year. Negative growth is rarely a situation investors should want to get involved in, but if you are a current shareholder, then you will want to watch Hershey's report closely, as it will provide information about consumer and industry conditions.

With this said, Mondelez should take note of Hershey's product innovation and find ways to innovate itself, or make a strategic acquisition to get back on the path of growth. Needless to say, Hershey looks like the better company to own right now.

The Foolish bottom line
Hershey is a great American company that is growing its market share both here and abroad through organic growth, product innovation, and acquisitions. I believe the current analyst estimates are attainable. Foolish investors should consider initiating positions now because Hershey has immense upside potential following the recent decline and it is well-positioned to outperform the market going forward.

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Joseph Solitro has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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