Hershey Company hits a new high
Hershey Company raises price increases
Hershey Company (NYSE: HSY) isn’t a bad investment, but it’s one of the most valued stocks in the consumer staples group. The stock trades at around 27 times forward earnings, but you get a lot for what you pay for. The Hershey Company is one of the most established brands in the food industry in general, not to mention its place in the candy business, and it’s a well-run business on top of that. Add a safe dividend yield of 1.85% and the picture becomes much clearer, but there is a fly in the mix in the form of inflation. The company is tracking inflation but expects most of its growth in 2022 to come from rising prices. Price increases are meant to offset inflation and do their job, the problem we see is that price increases can reduce overall business activity, as we have already seen in retail sales data.
Hershey exceeds the consensus, solid guides for 2022
Hershey had a good quarter and increased sales by 6.4%. The net $2.33 billion also beat the consensus estimate by 260 basis points, but the company estimates that 6.1% of the gain was due to “price realization.” Price realization is higher prices for products sold, leaving only 0.3% volume growth and there is the addition of acquisitions to consider. Acquisitions account for 220 basis points of growth and are partially offset by a negative FX headwind. On an organic basis, sales were only up 4.0%, meaning volume is really down and offset by price increases that are expected to continue into 2022.
Moving down the report, the company saw a 50 basis point contraction in adjusted gross margin despite the aggressive price increases. This left the AGM at 43.5%, which is slightly better than expected. Ultimately, Adjusted EPS of $1.69 was up 13.45% year over year and beat consensus by $0.07.
The company expects to raise prices again this year and is guiding the market higher because of it. The new forecast calls for revenue growth of 8% to 10% compared to the 5.4% forecast by Marketbeat.com’s consensus estimate. The only good news is that margin expansion is expected and will lead to earnings growth of 9% to 11%. That puts Adjusted EPS near $7.83 versus the consensus of $7.60, but there is another sticking point. The margin expansion is due to expected reductions in advertising spend which could negatively impact results.
“The company expects net sales growth to be driven primarily by list price increases across all segments. Pricing is expected to partially offset labor investments, as well as higher logistics costs and commodity inflation Sales growth and increased media efficiencies should more than offset gross margin pressures to drive adjusted earnings per share growth.
The Technical Outlook: The Hershey Company Reaches a New High
Hershey Company stock hit a new high on the heels of fourth quarter results and is heading higher by the looks of the chart. The indicators are also rolling towards a bullish signal, but MACD has not yet made its crossover. There is a risk that the bullish momentum is without much strength due to the weak nature of the MACD. If this is true, we would expect to see signs of resistance starting to appear almost immediately. If not, this stock could consolidate at current levels and then rise as quality income investors move in, but we prefer other consumer staples to more low value and higher return.