It hasn’t been a great year for Hershey’s (HSY, Financial) investors, as the stock has lost over 11% since the beginning of the year. The company posted first-quarter fiscal 2015 results that failed to impress the analysts. Is it the right time to open a position? Let’s take a look.
First-quarter review
Hershey’s first-quarter fiscal 2015 revenues came in at $1.94 billion, missing analysts’ expectations by $20 million. However, the top-line grew 3.5% year over year. Currency translations headwinds impacted top-line by 1.1%. Also, adjusted earnings per share came in at $1.10, missing estimates by $0.07. EPS registered a 3.5% year-over-year decline.
However, sales in North America moved up by 2.9% year-over-year, despite currency headwinds of 0.6% in Canada.
In the internal segment, which represents just 12% of revenue, performance in China was a big letdown. Sales in China slumped 47% year-over-year as a result of the change in government policy with respect to gifting as well as slowing down of Chinese economy.
Acquisition will drive growth
According to Euromonitor International, jerky sales accounted for close to half of the $5.9 billion in sales of snacks other than chips, pretzels, nuts, popcorn and dried fruit treats.
Recently, Hershey entered the $2.5 billion meat snacks industry with the acquisition of Krave, a maker of jerky. KRAVE gourmet-inspired, natural jerky made a debut , as part of the Hershey portfolio, during the NCA Sweets & Snacks Expo.
This acquisition along with product innovation in this category will be a big growth driver in the long run.
Product innovations to drive growth
Hershey unveiled a few innovative products during the NCA Sweets & Snacks Expo, which are expected to drive growth in the long run. For example:
- Brookside Fruit & Nut Bars, snack bars made with real fruit, whole roasted almonds, rolled oats, pumpkin seeds and signature Brookside dark chocolate, will be launched in August in three flavors.
- Brookside Crunchy Clusters Almonds and Berry Flavor is slated to be launched in December and expand the Brookside Crunchy Clusters portfolio.
- Snack Bites are a mix of delicious nuts and Hershey’s iconic confection brands.
- Snack Mixes are a combination of sweet, salty, crunchy and creamy tastes in Hershey’s and Reese’s varieties. Both Snack Bites and Snack Mixes will be available in August in portion-controlled tube packs.
These product innovations are part of the company’s strategy to drive growth.
Investor friendly
The company repurchased 202 million shares in fiscal 2014 and followed it up with repurchase worth $173 million of outstanding shares in the first quarter of 2015. In addition, the board recently authorized $250 million for buybacks.
Going forward, I expect that the company will continue returning value to shareholders through buybacks. During the first-quarter the company declared quarterly dividend of $0.54 per share.
Wrapping up
Hershey posted soft results for first-quarter fiscal 2015. However, the company works on long-term growth model, where sales growth projections are pegged at 5% to 7%. Despite the modest sales growth of 3.5% in the first-quarter fiscal 2015, Hershey expects fiscal 2015 sales growth to be in the range of 4.5% to 5.5%. In fact, analysts expect next five year growth to be at a CAGR of 9.38%.
At the current price levels of around $93, it is trading at a decent valuation. Hence the pullback is a decent buying opportunity.
