The Hershey Company A Top Pick At Evercore
Evercore ISI just released a note on consumer staples The Hershey Company (NYSE: HSY). Amongst a host of consumer staples companies with ever-improving fundamentals, Evercore says Hershey's gives the best execution and visibility for the sector. Analyst David Palmer points to sales growth in both the measured and non-measured channels and the potential for upside versus the Q2 consensus for organic sales. Sales in the measured channels are up 7% over the recent 12 week period versus the consensus target of 5.5% organic sales growth and that's not even talking about earnings. Along with recently gained leverage, Hershey's commodity hedges are viewed as a net positive in the current inflationary environment and we agree.
Is Hershey Company Fairly Valued?
Evercore maintained an Outperform rating on the Hershey Company and the price target of $180. That works out to about 24X the 2022 earnings estimate and compares to a consensus closer to $167. The average analyst rating is a buy, 9 of the 15 current ratings are a buy or better with 6 neutral. The high price target is held by Citigroup and that is $187, a price target that we think might be reached late in the second half of the year.
Trading near $172 the stock is valued at about 24X this year's consensus earnings estimate and 23X next year's earnings estimate. That's a bit high compared to the broad market which is trading about 22 to 23 times this year's earnings and for the sector. While the most highly valued stocks in the sector are trading in the range of 30 to 35X earnings there are some like Kraft-Heinz (NASDAQ: KHC) that trade closer to 15X earnings and those stocks provide a better yield scenario as well.
The Hershey Company is a fantastic dividend payer with a positive outlook for future dividend increases but value-minded and/or income investors may wish to look elsewhere. The company has been increasing the payout for the last 12 years but has a low 6% distribution cagr, a relatively High 46% payout ratio, and less than 2% yield. The payout ratio is not a worry nor is the balance sheet but there are better yields in the sector. Kraft-Heinz, for one, Is paying close to 4% in yield and it is a relatively safe payment. While Kraft-Heinz is not expected to make a distribution increase this year it is deep in the process of repositioning itself and reinvigorating growth in a way that we see leading to future increases. Snack maker Mondelez (NASDAQ: MDLZ) trades at 21X its earnings and yields over 2%.
Hershey's Earnings Outlook Is Sweet Enough
Hershey's Q2 earnings outlook is sweet enough but may not be enough to drive shares to a new high this reporting cycle. The company is expected to post $1.83 billion in net revenue which is a sequential slowdown but worth 7% in growth over last year and 3.3% in growth over the two-year period. That 7% is in line with sales data cited by Evercore, a target that may be on the high side in light of recent sluggishness in the economic data. Hershey's fiscal 2022 revenue strength is predicated on economic reopening and food-away-from-home spending.
Price action moved higher in the early portion of the session but resistance appears to be present at the short-term moving average. If the price action cannot get back above the short-term moving average we see this stock selling off to firmer support levels near $168 or possibly as low as $164. Hershey's is scheduled to report earnings in late July.
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