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Hershey's Semi-Sweet Q3

Posted: Oct 21, 2008 14:39 PM by Glenn Curtis

Tickers in this Article: CBY, HSY

Candy maker Hershey Co. (NYSE:HSY) managed to beat earnings expectations last week when it announced its third-quarter results, but the company's weak guidance left a bad taste in my mouth. I have both good and bad feelings about the numbers and the release.

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First The Good
In the period ended September 28, the Pennsylvania-based company earned 54 cents a share. However, according to Reuters, “Excluding costs to overhaul its supply chain, earnings were 64 cents a share, matching the average analyst estimate posted by Reuters Estimates and down from 68 cents a year earlier." (For more on analyst expectations, read Analyst Recommendations: Do Sell Ratings Exist?)

Given the environment we are in and the number of earnings disappointments we’ve seen in recent weeks, simply meeting expectations seems like an achievement. Seriously, this could draw a lot of attention and the shares could get a short-term boost as a result. Investors often chase results. The shares closed 6.9% higher in October 16 trading.

The release said Hershey's is expecting “net sales growth of 3-4 percent and diluted earnings per share from operations toward the lower end of the $1.85 to $1.90 range” for 2008. That's good news because the Street was reportedly expecting $1.83. This upbeat guidance could draw investors and perhaps propel the shares higher in the coming days as well. (Explore the controversies surrounding companies commenting on their forward-looking expectations in Can Earnings Guidance Accurately Predict The Future?)

The fact that the company was willing to make that comment regarding the full year with only a portion of Q4 under its belt is, I think, a good sign as well.

On The Downside
A couple of things stand out to me. First, Hershey's stock trades at about 19 times the company’s 2008 guidance. That’s not too attractive in my book. I might be a little more excited under 15 times guidance. That’s what some institutions may be thinking as well in this environment – not to pay too high a price lest this market takes an even bigger turn for the worse.

According to Yahoo Finance, larger players in the stock include T. Rowe Price Associates, Capital World Investors, Hershey Trust Company and FMR.

The next thing that irks me is that in its release, the company offered up the following: “We expect 2009 earnings per share-diluted from operations to increase; however, it will be at a rate below our long-term objective of 6-8 percent growth due to higher commodity prices, which remain at levels well above a year ago despite recent declines, as well as greater levels of consumer investment."

That’s not an exciting growth rate in my mind. Plus, what happens if the economy really takes a turn for the worse? Given that expectation and the multiple based on current-year earnings guidance, I’m not inspired to buy the stock.

Finally, it’s not like other candy/goodie companies are sitting still. Cadbury (NYSE:CBY) is in the midst of a turnaround. Also, I’m not too sure that Nestle or Mars, which makes Twix and M&Ms, are going away anytime soon.

Bottom Line
Hershey’s Q3 bottom line was decent. But its forward-looking guidance isn’t all that inspiring so the stock, at least in my mind, remains less than scrumptious.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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