Why Hershey Could Continue to Beat the S&P 500

The stock appears to have further growth potential

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Hershey (HSY, Financial) is in the process of implementing a revised strategy that could deliver further outperformance of the S&P 500. It is seeking to become increasingly innovative, with it expected to launch further new products during 2019. It is also investing heavily in international opportunities, while seeking to maximize the return potential of recent acquisitions.

Although the company’s forecast growth rate for 2019 is disappointing, the company is taking a long-term view. Strategies such as price increases and a greater focus on high-margin products could pay off in 2020 and beyond.

Following a 9% rise in its stock price versus a 1% decline for the S&P 500 in the last year, the company could generate further outperformance of the wider index.

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Changing strategy

Hershey intends to make better use of its in-house creative studio and new media models in order to provide better shelf impact and velocity for its portfolio of brands. Alongside this, it will leverage more efficient marketing models to support its brands, with there being the potential to bring a number of smaller, but highly differentiated, products to market in 2019. This includes the expected launch of Reese’s Thins after Easter. They are set to benefit from improved packaging, as well as increasing spend on in-store merchandising, TV advertising and social media.

The company will focus on securing incremental retail space across its portfolio of brands. It is seeking to evolve its relationships with retailers in order to adapt to changing consumer tastes. It recently partnered on a new front-end planogram at a key retail customer to increase space for snacking products. So far, sales have increased by 500 basis points in stores that have used the new planogram. Its roll-out, as well as scope to further improve its retail partnerships, could catalyse its sales performance.

Growth catalysts

Recent acquisitions could boost the company’s sales growth. The integration of recently-acquired Amplify is on track, with the business unit forecast to grow in the mid-single digits in 2019. The acquisition of SkinnyPop is expected to lead to growth within the ready-to-eat popcorn category, with the company set to put in place a revised marketing strategy. Likewise, the integration of Pirate’s Booty is progressing as expected. The Amplify management team is expected to take on selling responsibilities for the brand, with an increasing focus on greater shelf presence and category management capabilities due to be put in place.

International growth has been encouraging, with the company putting in place a strategy that has seen it increase market share in key markets. In Mexico, for example, it has grown market share in the last 17 quarters, while the launch of Kisses in India has been well-received by consumers. Product innovation such as gifting items under the Kisses brand in Mexico is expected to lead to the capturing of a premium price point. Further investment in fast-growing markets could diversify the company’s geographical reach, as well as improve its growth rate.

Threats

The financial outlook of the company in the 2019 fiscal year is disappointing. It expects the softness experienced in its non-chocolate portfolio in fiscal 2018 to persist into fiscal 2019. It also anticipates that there will be further sales declines from a rationalization program which is expected to cause lower-performing product variants to be culled in favour of better selling, high-margin items within each of its product categories. This is due to contribute to an increase earnings of just 1% on a per share basis in fiscal 2019. Its P/E ratio of 19 suggests that investors are expecting a stronger rate of growth, which may inhibit its stock price performance in the near term.

Hershey’s financial prospects for 2019 will be impacted by it losing the benefit of new revenue from recent acquisitions. This helped to provide a boost to sales in fiscal 2018. The company is also implementing price increases that are expected to cause an uplift in the cost of its products of 2.5% this year. This is expected to cause a drop in volumes in the short run, but is forecast to have a positive overall impact on sales in the long run. Dropping a variety of lower-margin brands is also expected to improve margins in the long run.

Outlook

Changes being made to Hershey’s strategy could lead to further gains for its stock price over the long term. Investment in its international operations and recent acquisitions could act as growth catalysts on its financial performance. An evolving strategy that will include increasing innovation may also help to differentiate its products and strengthen its competitive advantage.

While its earnings growth in 2019 may disappoint, it is forecast to record a rise in profit of 5% in 2020. Changes to its business, including price rises and a focus on higher-margin brands, may lead to further growth in the long run. This may mean it can justify a higher rating, and thereby deliver further capital growth after outperforming the S&P 500 in the last year.

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