Big 20% Pullback: Buy The World Renowned Hershey Company?

| About: The Hershey (HSY)


I would love to own if it were ever cheap enough to yield 3.5% but that may be out of the cards.

Stock got a recent major boost from a buyout offer but has since dropped 20%.

Should you buy?

We need to understand performance of the name and so I discuss the recent Q3 and expectations moving forward.

The Hershey Company (NYSE:HSY) continues to be a name I would love to own if it were ever cheap enough to yield 3.5%. Truthfully I had not looked at the stock in over two years before covering it a six 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. 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 which brought the name to an all time high of $117.79, the stock has now pulled back over 20%. Is it time to buy?

Well that would depend on performance of the name. And that said, the company has just reported third 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 $2 billion, and actually rose 2.2% year-over-year. Of course currency accounted for a 0.2% headwind, so on a constant dollar basis sales were up 2.4%. This also beat estimates by $10 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 helped by increased levels of direct trade resulting in a net price realization which was favorable by of 0.7 points. Volume was up 1 point due to sales growth and better than expected timing on some North American shipments. There was a positive impact from acquisitions and divestitures of 0.7 points. Another thing to note was that total advertising and related consumer marketing expense declined in Q3 2015. I will add that selling, marketing and administrative expenses also declined about 2% in the quarter. Margins dipped slightly to 42.5%. But the overall strong performance led to Q3 earnings of $1.06, and after making adjustments, $1.29. This beat estimates by a strong $0.10.

But can you buy here? The stock has been for traders mostly, but hasn't moved significantly higher years until the Mondelez offer. Now the stock has given much of those gains back. For the stock to move higher on its own 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% recently which strong. Looking ahead, the company expects constant dollar sales for 2016 to grow 2%. Earnings after adjustments should grow 4% to 5% to $4.28 to $4.32. Is this growth worth a buy here when the stock is trading at a premium multiple? I don't think so. Let it pull back further. 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. Despite the positives for the company, the stock is a hold and I will reconsider below $90.

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.