Hershey's Shares Fall Sharply Following Disappointing Earnings Results; Is This a Buying Opportunity?

Hershey has just released its first-quarter results and its shares are plummeting, let's find out what we should be doing now.

Apr 28, 2014 at 2:32PM

Hershey (NYSE:HSY), one of the largest and most popular chocolate and candy producers in the world, has just released its first-quarter report for fiscal 2014. The results have caused its shares to make a sharp move lower and it is not clear if this is the start of a large-scale sell-off or an opportunity to buy. Let's break down the report and the company's outlook for the rest of the year to determine if we should initiate positions right now or if we should avoid it and consider investing in Mondelez International (NASDAQ:MDLZ) instead.

Images

Source: Hershey's Facebook

The quarterly results
Hershey released its first-quarter report before the market opened on April 24 and the results were mixed in comparison with expectations; here's a breakdown:

MetricReportedExpected
Earnings Per Share $1.15 $1.14
Revenue $1.87 billion $1.91 billion

Source: Benzinga

Hershey's earnings per share increased 5.5% and revenue increased 2.4% year-over-year, as global volume increased 3.2%. Sales in the United States and Latin America were weaker than anticipated and this led to the weak revenue results, but Hershey noted that the trend has shifted in a positive direction; this, of course, was helped by the Easter holiday.

Images

Source: Hersheys.com

Gross profit increased 2.3% to $870.83 million and the gross margin took a slight hit, declining 10 basis points to 46.5%, as Hershey faced higher input costs that could not be offset by supply chain productivity and cost-savings initiatives. Hershey added that it has and will continue to face higher expenses in Mexico going forward as a result of the country's new tax legislation on certain food products.

Overall, it was a disappointing quarter for Hershey and the stock reacted by falling more than 4% in the trading session that followed. A sell-off of this magnitude seems a bit overdone, but before we make a final decision on whether or not this is a buying opportunity, let's take a look at the company's expectations going forward...

What will the rest of the year hold?
In its report, Hershey stated that it expects sales to "accelerate over the remainder of the year" and this led the company to reaffirm its full-year guidance; here's what it expects to accomplish:

  • Adjusted earnings per share in the range of $4.05-$4.13, an increase of 9%-11% from fiscal 2013
  • Revenue growth of 5%-7%
  • Gross margin expansion of approximately 30 basis points
Images

Source: Hershey's Facebook

Hershey's management added that the company will launch York Minis and Hershey's Spreads in instantly consumable containers in late May, while Ice Breakers Cool Blast Chews and Brookside Crunchy Clusters will come to the market in the third quarter; also, the company will continue to expand the distribution of Hershey's chocolates, Hershey's Kisses, and Reese's Peanut Butter Cups in the second half of the year. These new products and expansion plans are major positives for the company and they provide immense support to management's view that sales will accelerate in the coming quarters.

I believe Hershey's outlook and product launch information prevented an even worse decline in the stock and these items actually make a strong case for buying on the dip. The expansion of core brands and the new products coming to the market present a high-growth opportunity, and I believe Hershey will deliver for investors. For these reasons, I would be a buyer of Hershey right now and would add to the position on any further weakness; by scaling into the position, we can take advantage of lower levels if they were to come, which would bring our average purchase price down and increase the potential return on investment.

Does Mondelez represent a sweeter opportunity?

Logo

Source: Mondelez International

Mondelez International, the company behind brands such as Cadbury, Milka, Stride, and Trident, is one of Hershey's largest competitors and it has scheduled its first-quarter results for release on May 7. Hershey's struggles during the quarter may be a warning sign for Mondelez's upcoming report, but Mondelez may also have an opportunity to gain market share. Here's what analysts currently expect to see:

MetricExpectedYear Ago
Earnings Per Share $0.33 $0.34
Revenue $8.63 billion $8.74 billion

Source: Estimize

Heritage

Source: Cadbury

These estimates call for Mondelez' earnings per share to decline 2.9% and revenue to decline 1.2% in comparison with the year-ago period. Even though Hershey's quarter was disappointing, it did not show negative growth like analysts currently expect out of Mondelez, which is a major red flag for investors. Also, it is worth noting that Mondelez does not have any major new products coming to the market that would cause increased expenses during the quarter.

I believe Hershey's quarter may be a slightly negative indicator, but with the current earnings expectations for Mondelez already negative, I would not touch its stock. Hershey's quarter may not have had the growth analysts wanted to see, but its long-term potential is much greater than Mondelez'.

The Foolish bottom line
Hershey's mixed quarter has sent its shares tumbling over 4%, but I believe this is a great opportunity to buy. The growth story is still intact as Hershey will bring several new products to the market in the coming months and it will do this while expanding its existing brands internationally. Foolish investors should use this sell-off to initiate long-term positions in the stock and add to them on any further weakness, and then let price appreciation and Hershey's sweet 2% dividend provide substantial returns for years to come.

It may not be chocolatey, but you don't want to miss this
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with amazing potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303%! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers