NEW YORK — Strong consumer trends in the confectionery category and prospects for improved margins have bolstered the outlook for The Hershey Co., said Robert Moskow, a shares analyst with Credit Suisse, New York. Mr. Moskow has raised his price target for Hershey to $82 from $78.
“While some investors are concerned that Hershey’s sales growth will decelerate when the company laps the pricing it took in 2011 and 2012, we think they underestimate the degree to which volume will accelerate behind new products, the Brookside acquisitions and further expansion in China,” Mr. Moskow said.
Elaborating on the sales trends, Mr. Moskow cited Nielsen data indicating volume trends accelerating as consumers adjust to higher price points.
Contributing to the price strength are new products, including Minis, Simple Pleasures and the line of products that are part of the Canada-based Brookside Foods, Ltd. acquisition, Mr. Moskow said. Brookside specializes in producing chocolate covered fruit pieces. He said the Brookside products and other new items position Hershey more competitively in the “sharing” segment, doing so without going head to head with M&M’s.
“The Brookside business has the most upside of all of these new items, in our view, because management is doubling the manufacturing capacity and testing single-serve packaging formats,” Mr. Moskow said. “We expect Brookside sales to reach $200 million in sales quickly as it gains distribution in grocery and drug stores in 2013 and convenience stores in 2014. In addition, we expect the $450 million emerging markets business to grow another 20% in 2013, helped by the launch of Ice Breakers Sours in China.”
Giving Mr. Moskow cause for optimism longer term is continued aggressive Hershey investment in its sales force, a new research and development center and category management work.
“They also are in the process of deciding where to build a new manufacturing facility — it might be Singapore, it might be mainland China,” Mr. Moskow said. “This is important because Hershey needs local manufacturing to adapt to local consumer tastes. The Hershey brand name has some Western cache, but the consumer palate in China is different. Also, the price/ounce for chocolate in China is higher than in any market around the world, so they need to come up with smaller pack-sizes someday that are affordable for the instant consumable market. This is hard to do. Right now Hershey is only in gifting, not single-serve.”
Mr. Moskow described Hershey as “on track” in its five-year plan focused on five global brands: Hershey, Reese’s, Ice Breakers, Jolly Ranchers and Kisses. Significant declines in cocoa and sugar prices from 2011 highs also contribute to Mr. Moskow’s optimism about margins. He expects a 120 basis point improvement in gross margins in 2013.