Increased Cash Distribution Could Make Hershey (HSY) Attractive - RBC

RBC Capital analyst, David Palmer, thinks The Hershey Company (NYSE: HSY) could be a sweet investment if it embraces a more food like model of low growth but greater cash flow through to shareholders. He slightly reduced his price target to $92 from $95 to account for the strengthening dollar and international headwinds but maintained the Sector Perform rating.

Hershey's sales growth rate has decelerated from the 7%-9% range it achieved in 2010-2013 to the low single digit growth rate typical of US packaged food companies today. A new long-term target of 2%+ revenue growth with 6%-8% EPS growth driven by heavier share buybacks, productivity, and overhead reduction (plus dividend) can be a catalyst (or at least limit downside) for the stock in 2016.

Recent trends may imply stabilizing US volume in 2016: Hershey's measured channel trends improved significantly in 4Q, partly with the help of easier comparisons. In 4Q, Hershey sales grew 2% (volume -2%) which was better than 3Q's 1.5% sales growth (volume -5%). We were heartened to see slowing declines in high-margin everyday chocolate volumes (-2.5% 4Q v -6.7% 3Q; 60% of sales) and a strong contribution from recent innovation (i.e. Kisses Deluxe, Ice Breaker Cool Blasts, Caramels, Snack Mixes) which accounted for ~60% of 4Q measured sales growth.

While they do not see a clear case for strong domestic revenue trends given declining sweet snack consumption, Hershey's valuation is now cheap to peers and the company has significant cost opportunities should it embrace a food-like earnings algorithm (one with more assured total return to shareholders e.g. higher cash back to shareholders).

For an analyst ratings summary and ratings history on Hershey click here. For more ratings news on Hershey click here.

Shares of Hershey closed at $83.77 yesterday.

You May Also Be Interested In

• Goldman Sachs on Meta Platforms Inc. (META): 'We expect investors to have an initial negative reaction'
• BofA Securities Upgrades Bharat Forge Ltd. (BHFC:IN) to Buy
• JPMorgan Downgrades Monster Beverage (MNST) to Neutral