Argus Downgrades Hershey to “Hold”

The Hershey Company (HSY) has a market cap of $23.9 billion. Its stock fell by 1.3% to close at $110.55 per share on July 5, 2016. The stock’s weekly, monthly, and YTD (year-to-date) price movements were 13.7%, 18.2%, and 25.5%, respectively, on the same day. HSY is trading 12.9% above its 20-day moving average, 17.5% above its 50-day moving average, and 22.7% above its 200-day moving average.

The iShares Edge MSCI USA Quality Factor ETF (QUAL) invests 0.95% of its holdings in Hershey. The ETF tracks an index of US large- and mid-cap stocks, selected and weighted by high return on equity, stable earnings growth, and a low debt-to-equity ratio. The YTD price movement of QUAL was 1.8% on July 5.

The market caps of Hershey’s competitors are as follows:

• Mondelez International (MDLZ): $70.3 billion
• General Mills (GIS): $43.1 billion

Argus has downgraded Hershey’s rating to “hold” from “buy.”

In a press release on June 30, 2016, Hershey stated, “The Hershey Company (HSY) today confirmed that it had received a preliminary, non-binding indication of interest from Mondelez International (MDLZ) to acquire the company for a mix of cash and stock consideration, totaling $107 per share of Hershey’s common stock. The indication of interest also included other non-monetary considerations.”

Hershey rejected this $23 billion offer from Mondelez International. This transaction would have expanded Mondelez International’s business and created the world’s largest confectioner.

After Hershey received this offer, Moody’s Investors Service said that the preliminary, non-binding indication of interest from Mondelez International was credit negative. Moody’s also kept Hershey’s A1-P1 rating and its stable outlook for the stock.

Hershey reported 1Q16 net sales of $1.8 billion, a fall of 5.6% from net sales of $1.9 billion in 1Q15. The company reported business realignment charges of $6.1 million, compared to $2.7 million in 1Q15.

From 1Q15 to 1Q16, due to the implementation of productivity and cost-saving initiatives, the company saved $16.6 million in unallocated adjusted corporate expenses.

Hershey’s net income and EPS (earnings per share) fell to $229.8 million and $1.06, respectively, in 1Q16, compared to $244.7 million and $1.10, respectively, in 1Q15.

From 4Q15 to 1Q16, Hershey’s cash and cash equivalents fell by 17.5%, and its inventories rose by 2.6%. Its current ratio fell to 0.76x, and its debt-to-equity ratio rose to 5.0x in 1Q16, compared to 0.83x and 4.1x, respectively, in 4Q15.

Hershey has made the following projections for 2016:

• net sales growth of ~1.5%, including a net benefit from acquisitions and divestitures of ~0.5%
• net sales growth of 2.5% on a constant-currency basis due to the unfavorable impact of ~1% from foreign currency exchange translations
• reported EPS in the range of $4.16–$4.23
• adjusted EPS in the range of $4.24–$4.28, including the barkTHINS dilution of $0.05–$0.06 per share

In the next part of this series, we’ll discuss Bunge Limited (BG).