Hershey (HSY 1.08%) is one of the most recognizable brands in the United States and its stock performed accordingly in 2013, with a rise of 34.63%, which widely outperformed the S&P 500's return of 29.69%. This great performance led to an analyst upgrade on Jan. 8, and it seems like the stock could put up a similar performance in 2014 for several reasons to be named shortly. Hershey is set to report earnings on Jan. 30, so let's take a look at these factors and see if we should initiate positions now or if we should wait to see what the report holds.
The king of chocolate
Hershey is one of the largest producers of chocolate and confectionery products, candy, and gum in the world. The company is home to more than 80 brands, including Hershey's, Reese's, Kit Kat, Twizzlers, Jolly Rancher, and Ice Breakers. The company also offers premium and artisan chocolate products under brands such as Scharffen Berger and Dagoba; these premium products are offered through the Artisan Confections Company, one of Hershey's wholly owned subsidiaries.
Last time out
Hershey' third-quarter earnings were released on Oct. 24 and proved to be a mixed bag. Here's a breakdown of the results:
| 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, driven by organic sales growth of 6.6%. Gross profit increased 15.2% to $855.55 million as Hershey's margin expanded an impressive 300 basis points to 46.2%. In the report, Hershey's management also reaffirmed the company's full-year outlook and cited core brand performance and new products as drivers for fourth-quarter growth. Overall, it was a great quarter and investors should ignore the narrow miss on revenue.
Expectations and what to watch for
Fourth-quarter results for Hershey are due out before the market opens on Jan. 30, and analyst estimates predict growth on both the top and bottom lines once again. Here's an overview of the expectations:
| Metric | Expectations | Year-Ago |
|---|---|---|
| Earnings per share | $0.86 | $0.74 |
| Revenue | $1.90 billion | $1.75 billion |
These estimates would result in earnings per share growing 14.9% and revenue rising 8.6% year over year. On top of this growth, I also expect Hershey to report a rise in gross profit and a higher gross margin because of lower commodity costs, supply chain productivity, and cost savings initiatives, like we saw in the third quarter. Other than these key statistics, it will be important to look for updated information about the release of Lancaster Soft Cremes in the United States and the addition of the Jolly Rancher brand in India.
Lancaster is the first new brand to be introduced to the U.S. market by Hershey in 30 years, so investors are anxious to see what Hershey expects in terms of revenue for the year. With this said, the expansion of Jolly Ranchers into the Indian market could be even bigger; India has the second-largest population in the world, approximately 1.2 billion people, which means the revenue possibilities are through the roof. If Hershey reports solid earnings numbers and these two product launches succeed, the stock could be pushed much higher.
Update on the competition
On Oct. 1, we took a look at Mondelez International (MDLZ 1.13%) and Tootsie Roll Industries (TR 0.68%), two of Hershey's largest competitors. As mentioned in that 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. We concluded that Hershey was the best pure play on the American chocolate market and Mondelez was a close second, but that we should stay away from Tootsie Roll due to its slowed growth. Let's take a look at the performance of each of these stocks since Oct. 1:
| Company | Performance Since Oct. 1, 2013 |
|---|---|
| Hershey | 5.57% |
| Mondelez International | 12.87% |
| Tootsie Roll Industries | 2.47% |
Performance as of market close on Jan. 8.
Mondelez outperformed the S&P 500's 8.37% rise, while Hershey and Tootsie Roll underperformed. I still believe that Hershey is the top play of all confectioners because of its brand strength and expansion, and also because it is expanding globally while keeping up its share in the U.S. market; 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 greatly over the last several quarters and management has done very little to change this.
The Foolish bottom line
Hershey is an American icon and its stock was one of the market's top performers in 2013. The company is expected to show growth on both the top and bottom lines in 2014, and its brand launch in the U.S. and brand expansion into India could support a much higher stock price. I believe the current earnings expectations are attainable and the stock is undervalued at current levels, so investors should consider initiating a position before the release on Jan. 30 or on any weakness following the release.
