Have S'More Hershey Company?

| About: The Hershey (HSY)


Truthfully I had not looked at the stock in over two years before covering it a few months ago.

The stock was moving sideways for years until Mondelez offered to buy the company.

Following the rejection we now have to analyze the stock and the company on its own merits.

Q2 earnings are our and I discuss the implications.

It is an amazing dessert by the campfire, consisting of graham crackers, toasted marshmallows and a chocolate bar. I'm talking of course about a S'more. So good. And our chocolate bar of choice always comes from the Hershey Company (NYSE:HSY). Truthfully I had not looked at the stock in over two years before covering it a few months ago. To my surprise, the stock was essentially flat since the last time I looked at it. However, the stock got a jolt when Mondelez (NASDAQ:MDLZ) bid to buy the company for $23 billion. As we know, this is a premier candy and snack brand. It's a global name. We don't need to dig into the brands. You should be familiar with it them now. In a world where healthy eating is more popular than ever, it creates problems for a name like this, but the company adapts. It markets effectively. This is a global public food company. It isn't going anywhere. It will be around for many years to come. But after the recent "melt-up" in the stock, can you really consider buying here?

Well the company has just reported second quarter 2016 results. Now before delving into them let me say like so many domestic companies with international exposure I anticipated currency headwinds. Hershey's did not escape this headwind. Let's start with sales. Net sales were $1.64 billion, and actually rose 3.7% year-over-year. Of course currency accounted for a 0.8% headwind, so on a constant dollar basis sales were up 4.5%. This also beat estimates by $30 million.

I think that the issue of currency is still a risk but it has been tempered over the last year. Further the company has pricing power but this was more than offset by increased levels of direct trade resulting in a net price realization headwind of 0.5 points. Volume was up 3.1 points due to sales growth and better than expected timing on some North American shipments. There was a positive impact from acquisitions and divestitures of 0.5 points. Another thing to note was that total advertising and related consumer marketing expense increased about 5% versus Q2 2015. As we move into Q3, keep an eye out here, because Hershey's is now a sponsor of the Olympics for the first time in its 122-year history. I will add that selling, marketing and administrative expenses also declined about 2.6% in the quarter. Margins dipped slightly to 45.7%. But the strong performance led to Q2 earnings of $0.68, and after making adjustments, $0.85. This beat estimates by a strong $0.05.

But can you buy here? The stock has been great for trading, but hasn't moved in years until the Mondelez offer. For the stock to move higher we need to see higher sales and earnings (or at least expect them) and see increases to shareholder friendly policies like dividends and buybacks. We did see a dividend hike of 6%. That is strong. Looking ahead, the company expects constant dollar sales for 2016 to grow 2%. Earnings after adjustments should grow 4% to $4.24 to $4.28. Is this growth worth a buy here when the stock is trading at a premium multiple? I don't think so. The name in my opinion was a buy under $84 based on expectations for earnings, based on yield protection, and based on historical trading patterns when I covered the name three months ago. We are over 27 points higher than that mark. Despite the positives for the company, the stock is a hold.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.