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Why Hershey Stock Fell after Its Q3 2018 Results

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What impacted investors’ sentiments?

On October 25, the Hershey Company (HSY) announced its third-quarter earnings results, following which its stock fell ~5%. Hershey reported strong double-digit growth in its EPS and met analysts’ expectation on the bottom line front. However, its sales remained subdued, which didn’t sit well with investors. Continued weakness in its gross margin also remained a drag.

On a YTD (year-to-date) basis, Hershey stock is down 9.4% as weak organic sales and cost headwinds have taken their toll. Moreover, Hershey stock has underperformed the broader market so far this year. The S&P 500 Index is up 1.2% YTD.

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In comparison, stocks of other food manufacturers have also underperformed and eroded a significant amount of value so far this year. Shares of the Kraft Heinz Company (KHC), General Mills (GIS), the Campbell Soup Company (CPB), the J.M. Smucker Company (SJM), and Mondelēz (MDLZ) have fallen 28.0%, 25.0%, 21.1%, 14.3%, and 4.2%, respectively, on a YTD basis.

What could support Hershey stock?

Hershey disappointed investors on the sales and gross margin front during the third quarter. However, the company’s prospects look good for the fourth quarter. Hershey’s organic sales are expected to improve both sequentially and on a YoY (year-over-year) basis driven by higher volumes during the holiday season and new product launches. However, pricing could remain weak owing to trade spending. Pricing is expected to increase in 2019, which is positive.

Improving underlying business and incremental sales from acquisitions are expected to support Hershey’s top line. Meanwhile, the company’s gross margins are expected to show sequential improvement and could remain flat or improve on a YoY basis as Hershey faces easy comparisons during the fourth quarter coupled with improvements in sales.

The company’s bottom line could continue to grow at a healthy pace thanks to the lower effective tax rate. Healthy sales and improved margins should further cushion its bottom line.

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