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.

Joseph Solitro
Joseph Solitro
Apr 28, 2014 at 2:32PM
Consumer Goods

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.

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:

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.

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

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?

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

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.