Could Hershey’s Q2 Release Limit its Stock?

  • Hershey is set to announce its second-quarter results on Thursday. We expect its sales and earnings growth to be low.
  • Hershey stock has recorded phenomenal growth on increased pricing and favorable cost trends. However, its high valuation could restrict the stock.
  • Analysts’ target price indicates a pullback in HSY stock.

Hershey (HSY) is set to report its second-quarter results on Thursday. We expect Hershey’s sales and earnings to grow YoY (year-over-year), but that growth to be low. Hershey faces tough YoY comparisons due to incremental sales last year from its Amplify Snack Brands acquisition. SKU (stock keeping unit) rationalization could also remain a drag.

However, pricing and improved volumes could boost its organic sales. During its last reported quarter, Hershey’s organic sales increased 2%, driven by higher volumes. An extended Easter holiday supported the company’s volume growth, and its pricing rose marginally.

Could Hershey’s Q2 Release Limit its Stock?

We expect Hershey’s profit margins to continue to expand in the second quarter. Favorable commodity costs, cost savings, and higher net price realization could expand its gross margin.

We expect improved organic sales, cost savings, and margin expansion to support Hershey’s bottom line. However, its interest expenses and tax rate have risen YoY and could limit its EPS growth.

Analysts’ estimate for Hershey’s Q2

Analysts expect Hershey’s net sales to grow about 1% YoY to $1.8 billion, supported by higher pricing and volumes and limited by a tough YoY comparison. They expect Hershey’s bottom line to sustain its momentum in the second quarter, driven by cost savings and lower input costs and limited by higher interest expenses and tax.

Analysts expect Hershey’s adjusted EPS to grow 2.6% YoY to $1.17. The projected growth indicates a steep sequential slowdown.

Hershey’s valuation a concern

Hershey stock is trading at record highs and has risen 35.5% this year, boosted by better-than-expected sales, margins, and earnings. The stock jumped following Goldman Sach’s upgrade on July 17 to “neutral” from “sell” and target price increase to $142 from $86. Citigroup also raised its target price on HSY stock to $170 from $140.

While we expect Hershey’s bottom line to gain from its higher net price realization in the coming quarters, it has a higher valuation multiple than most peers, which could limit its upside. Piper Jaffray has downgraded Hershey stock, citing its high valuation.

Hershey trades at 25.3 times its 2019 estimated EPS of $5.73 and 24.0 times its 2020 estimated EPS of $6.04. Both figures make the stock look expensive, given its projected growth of 6.9% and 5.4% in those periods. Conagra Brands’ (CAG), General Mills’ (GIS), J.M. Smucker’s (SJM), and Mondelēz’s (MDLZ) valuation is lower but they offer similar growth. The stocks’ forward PE multiples are 13.8x, 15.7x, 13.5x, and 21.7x, respectively.

Analysts’ target price suggest a pullback

Wall Street’s mean target price of $132.07 for HSY stock is about 9% below its Friday closing price of $145.18. Of the 16 analysts covering HSY stock, 11 recommend “hold,” three recommend “buy,” and two recommend “sell.”