- Hershey’s second-quarter sales came in line with analysts’ estimate and earnings beat estimates.
- HSY stock was trading low in the pre-market session following management’s guidance update.
- The company’s high valuation is likely to limit upside.
Hershey (HSY) announced its second-quarter results on July 25. The company’s top line continued to improve on a YoY basis. Meanwhile, it came roughly in line with Wall Street’s estimate. Higher net price realization and improvement in volumes drove the top-line growth. However, adverse currency rates and divestitures remained a drag.
Margins showed strong growth, which is impressive. Hershey’s margins benefitted from favorable input cost trends, productivity savings, and higher pricing. Moreover, favorable product mix and fixed cost absorption further cushioned profit margins.
Hershey’s bottom line continued to grow at a double-digit rate and came in well ahead of analysts’ estimate. Improved organic sales, margin expansion, and lower tax rate drove its adjusted EPS.
Despite the healthy quarterly performance, management’s updated sales outlook probably didn’t sit well with investors. Management now expects net sales to increase by 2% in 2019. Earlier, it projected 1% to 3% growth. Also, volumes remained subdued in North America. Hershey stock was trading about 4% lower in the pre-market session. Adjusted EPS are now expected to increase by 6% to 7% in 2019, which is at the higher end of its previous growth guidance of 5% to 7%.
Hershey posted net sales of $1.77 billion, which increased 0.9% YoY and came in line with analysts’ estimate. Pricing increased by 1.2%, while volumes were up 0.6%. Acquisitions and divestitures were a 0.6% drag. Meanwhile, volatility in the foreign currency exchange rate adversely impacted sales by 0.3%.
Adjusted gross margin expanded 200 basis points to 46.5%. Moreover, adjusted operating margin increased 150 basis points to 20.9%. Hershey posted adjusted EPS of $1.31, which increased 14.9% YoY and crushed analysts’ estimate of $1.18. Higher sales and margin expansion drove the company’s bottom line. Meanwhile, the adjusted effective tax rate declined 120 basis points and cushioned earnings further.
Hershey stock: valuation could stall the growth
In our earlier post on Hershey stock, we highlighted the fact that its valuation is a concern and could restrict upside. Hershey stock is up 36.9% YTD and trades at a forward PE multiple of 25.0x. The company’s valuation seems expensive given the projected EPS growth of 6% to 7% in 2019.
Also, Hershey stock trades at a significant premium (about 57% higher) to the peer group average of 15.9x.