The Hershey Company (NYSE:HSY), one of the world's leading manufacturers of chocolate, mint, gum, and other confectionary products, has watched its stock widely underperform the overall market in 2014 and weak first-quarter earnings have played a primary role in its decline. However, if one weak report can send the shares tumbling, then one strong report could send the shares soaring, right? With this idea in mind, Hershey has just announced that it will release its second-quarter earnings on July 24, so let's take a look at its most recent release and the expectations for the upcoming report to determine if the company is setting up to beat the estimates and then decide if its stock represents a long-term investment opportunity today.
The lackluster first quarter
On April 24, Hershey announced its first-quarter earnings and the results were mixed compared to the expectations of analysts; here's a breakdown:
|Earnings Per Share||$1.15||$1.14|
|Revenue||$1.87 billion||$1.91 billion|
Earnings per share increased 5.5% and revenue increased 2.4% year-over-year, driven by global volume rising 3.2%. Sales in the United States and Latin America were weaker than expected, which led to the disappointing revenue result, but Hershey noted that the trend shifted in a positive direction in the first weeks of the second quarter.
Hershey's gross profit increased 2.3% to $870.83 million and its gross margin took a slight hit, contracting 10 basis points to 46.5%. The contraction of the gross margin stemmed from a 3.2% increase in selling, marketing, and administrative expenses and a 2.3% increase in cost of sales because of higher input costs.
The above financial performance led to $203.76 million in net cash provided by operations, and this, paired with the $1.12 billion in cash and cash equivalents the company had to begin the quarter, enabled Hershey to repurchase $271.53 million worth of its common stock and pay $105.31 million in dividends during the quarter. The company ended the quarter with $1.01 billion in cash and cash equivalents, so it could easily accelerate its repurchases or increase its dividend in the next few quarters.
Overall, it was a fairly disappointing for Hershey and its stock responded by falling 4.12% in the next trading session. Although I did not believe a sell-off of this magnitude was warranted at the time, the stock has yet to recover its losses in the weeks since.
The expectations & what you should watch for
Hershey has scheduled its second-quarter results for release before the market opens on July 24 and the current expectations call for moderate growth; here's an overview:
|Earnings Per Share||$0.75||$0.72|
|Revenue||$1.61 billion||$1.51 billion|
These estimates call for earnings per share to increase 4.2% and revenue to increase 6.6% year-over-year, which seem attainable, especially since the company stated that it experienced positive sales trends in the US and Latin America at the beginning of the quarter. Here are three other statistics and updates investors will want to watch for:
- Third-Quarter Outlook: Besides the earnings per share and revenue results, the most important thing to look for in Hershey's report will be its outlook on the third quarter. Investors will want to be sure the company's outlook meets or exceeds the consensus analyst estimates, which currently call for earnings per share of $1.16 and revenue of $2.02 billion for year-over-year growth of 11.5% and 9.2%, respectively.
- Full-Year Outlook: Along with satisfactory guidance for the third quarter, investors will also want to look for Hershey to reaffirm its full-year outlook; this outlook projects earnings per share in the range of $4.05-$4.13, an increase of 9%-11% from fiscal 2013, along with revenue growth of 5%-7% and gross margin expansion of approximately 30 basis points to 46.2%.
- New Product Performance: The Hershey Company has released numerous new products in 2014 that include Lancaster Caramel Soft Cremes, York and Kit Kat Minis, and Hershey's Spreads. It has also expanded its existing products into new markets, such as its introduction of Jolly Ranchers in India. Thus, it will be important to look for any updates on the success or failure of these launches. The company has more products scheduled to hit the market in the second half, like Brookside Crunchy Clusters and Ice Breakers Cool Blasts Pouch, so Hershey may provide exact dates for those launches as well.
The Foolish bottom line: Will Hershey deliver?
If Hershey can satisfy analysts' expectations and the three elements noted in the section above, its stock could easily pare its year-to-date losses and start a positive run toward its 52-week high of $108.69 reached back in February; I believe it will do just this, driven by a very successful Easter holiday shopping season at the beginning of the quarter and quick market share gains by its new products.
I must also add that I believe Hershey represents a great investment opportunity today, not for the purpose of trading around its earnings release, but because its stock trades at just 21 times forward earnings estimates with a healthy 2% dividend yield, and the company's innovative ways will continue to drive growth in the years ahead. Foolish investors should take a deeper look and consider initiating positions right now.