A Look at Hershey’s Sweet Quarter and More
riddhi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The largest chocolate manufacturer in North America, The Hershey Company (NYSE: HSY), announced its second quarter results recently and trumped analysts estimates on the bottom line. Sales jumped roughly 6.7% and earnings rose 4.4% to 66 cents, despite higher input costs, reflecting revenue growth amid higher pricing and productivity gains.
Hershey’s consumers have plenty of appetite for its chocolates and candies at higher prices, which helped drive margins higher in the quarter and enabled the company to raise its outlook for the year. The company strategically phased in the price hikes, first on non-seasonal candy and then on sales around Easter, Halloween, Christmas and other holidays. However, increased prices did have a negative effect on volumes, which fell 1% from last year. However, Hershey is focused on building its brand and is game for a few hits to the volume in the short run.
Emerging markets growth
Hershey is often viewed as having more pricing power than some of its food industry peers, since chocolate often serves as an affordable luxury or indulgence. The net sales in international markets with a targeted focus on Brazil, Mexico, China and India seemed satisfactory on a local currency basis, despite the stronger US dollar. In China, Hershey continues to be one of the fastest-growing international chocolate companies.
The company is aiming to gain as much as possible through emerging markets, which is on the lines of what other consumer product companies like Kimberly-Clark (NYSE: KMB) are also doing. Kimberly-Clark had also raised its outlook for the year after beating profit estimates in its recently reported quarter. The company is also taking the route of price hikes in order to mitigate the negative effect of a sluggish market in the US and is finding traction in emerging markets.
Looking ahead and behind
For the rest of the year, it is expected that contributions from price and volume will be more balanced. For the full year 2012, it is expected that reported net sales outside of the US and Canada will increase about 15%, in line with the company’s strategic plan, including the negative impact of foreign exchange.
The threat of competition in North America from powerful global confectionary companies such as Nestle and Kraft Foods (NASDAQ: KRFT)) is effectively mitigated through the company’s pricing policy, new products, and core brand advertising including promotional tie-in with The Avengers movie.
Kraft is a more diversified entity and is looking to grow its businesses further and recently signed a deal with SodaStream to sell its beverages through SodaStream’s machines. However, from an investor’s viewpoint, Hershey has done better than Kraft year to date. Kraft has gained 5.5% in 2012 whereas Hershey has given a return of almost 17%.
My take on this...
Hershey has shown a pretty good performance in light of the slowing global economy, making it definitely attractive in today’s volatile market.
- Because of Hershey’s brand power, the company has been able to increase prices.
- The company has the advantage of massive scale, as it controls 43% of the North American market.
- Hershey’s valuation at a price-to-earnings ratio of 24 is reasonable in light of the company’s stability.
I believe one should strive to buy that company’s stock whose products are most loved and whose shares that your children’s children will never want to sell. So this company may just be the sweet investment that you have been looking for.
Riddhi2406 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Kimberly-Clark. 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.If you have questions about this post or the Fool’s blog network, click here for information.