We expect The Hershey Company (HSY) to beat expectations when it reports third-quarter fiscal 2014 results on Oct 29. Last quarter, the company delivered in-line earnings.
Let’s see how things are shaping up for this announcement.
Why a Likely Positive Surprise?
Our proven model shows that Hershey is likely to beat earnings this quarter because it has the right combination of two key ingredients.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +2.78%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.
Zacks Rank: Hershey carries a Zacks Rank #3 (Hold) which, when combined with +2.78% ESP, makes us confident about a positive earnings beat.
Note that stocks with Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
What's Driving the Better-Than-Expected Earnings?
Hershey’s first-half performance was below expectations due to abnormal shopping patterns, increased competition in the confectionery category, continued challenging macro environment and softer international growth. However, management expects sales to pick up in the second half on the back of solid seasonal growth, product launches and greater levels of merchandising, programming and innovation.
Moreover, Hershey plans to accelerate investment in the international markets. The company will continue to build Hershey’s chocolates and Hershey’s Kisses momentum and roll out Reese’s Peanut Butter Cup on a broader scale. These efforts are expected to boost growth in the international markets through the second half of 2014.
However, high dairy costs have dented the company’s gross margins in the first half. Moreover, though advertising costs were lower in the second quarter, management expects it to grow in a mid single-digit range in the second half with a greater increase in the third quarter. Thus, rising input costs, coupled with higher advertising expenses, will put margins under pressure in the quarter.
In mid-July, the company announced price increases for its chocolates and candies in response to rising input costs of its key ingredients. Management does not expect the price increases to have any material positive impact on 2014 results. According to Hershey, the higher pricing will benefit profits in 2015.
Other Stocks to Consider
Other stocks in the beverage/food sector that have both a positive Earnings ESP and a favorable Zacks Rank are:
Post Holdings, Inc. (POST), with an Earnings ESP of +50.00% and a Zacks Rank #1 (Strong Buy).
The WhiteWave Foods Company (WWAV),withan Earnings ESP of +3.85% and a Zacks Rank #3.
The J. M. Smucker Company (SJM), with an Earnings ESP of +1.21% and a Zacks Rank #3.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment