On Jan 16, chocolate giant The Hershey Company (HSY) reached a new 52-week high of $110.75 after Wells Fargo Securities upgraded its rating from “Market Perform” to “Outperform” and increased the target valuation range from $93–$95 to $122–$124. The firm also raised its 2015 earnings per share estimates to $4.56 from $4.46.
Wells Fargo Securities is the trade name for the capital markets and investment banking services of Wells Fargo & Company (WFC) and its subsidiaries.
Why the Upgrade by Wells Fargo?
Wells Fargo expects Hershey to deliver better gross margin gains in 2015 based on price increases, innovation and declines in input costs.
In mid-July last year, Hershey raised the prices of its chocolates and candies in response to rising input costs of key ingredients. Moreover, the analyst claims that milk powder and international sugar costs have declined in the second half of 2014, while cocoa inflation has flattened. According to Wells Fargo, the higher prices of its chocolates and lower input costs could improve gross margins.
This coupled with new products, productivity savings and SM&A (selling, marketing & advertising) leverage may drive gross margin expansion.
Why the Rise in Share Price?
Hershey reported dismal results in all the three quarters of 214, largely due to weak gross margins. The dramatic increase in dairy costs in 2014 severely hurt the company’s gross margins.
Moreover, greater-than-anticipated commodity cost headwinds and an unfavorable mix compelled Hershey to cut gross margin expectations thrice last year.
As such, a rating upgrade based on better gross margin expectations in 2015 naturally caught investors’ attention and led to the price rise.
Other Stocks to Consider
Hershey carries a Zacks Rank #2 (Buy). Other food companies worth considering include SUPERVALU Inc. (SVU) and Sysco Corporation (SYY). While SUPERVALU sports a Zacks Rank #1 (Strong Buy), Sysco has a Zacks Rank #2.
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