Hershey: Attractive Short?

Deutsche Bank is out with a negative call on Hershey (HSY) reiterating its HOLD opinion based on challenging fundamentals including competition and input cost volatility, a premium valuation, and difficulty of the changing US chocolate market. Although long term it believes the Trust will change its strategic approach, it doesn't think any action will occur short term.

The firm highlights several scenarios, noting most point to downside risk:

• A Hershey-Cadbury (CSG) deal would value the stock around $36 per share.
• A Cadbury-Hershey deal would value HSY around $47-$48, but there is minimal pressure on Cadbury to pay a premium for Hershey and, given activist shareholders and questions about Cadbury's execution missteps, any dilution to Cadbury would be viewed with significant skepticism.
• Nestle (SNRGY.PK)-Hershey. Recent unconfirmed press reports, as for example, in the Dow Jones wire service, on a Nestle-Hershey joint venture has led to investors to bid up the shares of Hershey. While an agreement between the two would certainly be advantageous to Hershey as it gives the company global distribution, the firm doesn't see much upside for Nestle.
• Kraft (KFT)-Hershey. This scenario to Deutsche Bank is the most unlikely.

Hershey's leadership team will host an analyst meeting in New York City on 6/17/08. With numerous intermediate term challenges, the firm expects CEO West to focus on long term turnaround efforts including greater brand support and higher quality. As a result, they expect management to lower long term EPS growth expectations to 6-8% vs. previous expectations of 9-11%.

Notablecalls: I think this is the call that should put the recent takeover chatter to rest. I would strongly consider shorting the stock here for a reactionary move down, (I would not overstay my welcome, though.)

Comments

[CarlosSlim]

One philosophy of investing is to invest in something you "know".

I do know that Hershey's chocolate sucks.

Ask anyone from anywhere in the world who has eaten good chocolate, they will tell you--Hershey's is poor quality stuff.

If you like Hershey's business model of selling poor quality product to American "rubes" who don't know any better, then I would suggest HSY is a "BUY".

[User 95972]

Most of Hershey's line that says Hershey's on it is pretty bad, but they have bought some good high quality brands like Sharffenberger, Joseph Schmidt, Dagoba.

[truthinvesting]

There are better shorts like this like Lehman brothers but I undertand the authors logic.