Hershey is a maker of confectionery products that include chocolates, gum, candies, beverages, toppings, and even baking ingredients. Founded in 1894 by Milton Hershey in the United States, today it has one of the best-known dessert brands and has operations in more than 6o countries.
We see a P/E multiple of 23x on 2020 earnings as more than generous, given the comps average of 20-21x and given that the case for a premium is a murky one at best, at this time. When we assign this multiple to our 2020 EPS estimate of $6.13, we get the target price of $141. We therefore see HSY shares as fairly valued.
Hershey's earnings produced a mixed bag, which was not enough to tilt us in either bullish or bearish direction. We remain in the wait-and-see mode, while highlighting the following key takeaways:
North America Mainly Driven by Pricing: We see the in-line revenue growth of approximately 2% Y/Y mainly driven by improved pricing in North America, though we do not believe that this pricing is sustainable into 2020. Therefore, the question of volumes will remain fairly acute next year.
Reese's Brand Remains the Company's Hidden Card: With Reese's sales growing 6% Y/Y, we see the marketing push for this brand as strong enough to warrant at least 20-25 bps of per quarter acceleration in 2020, on an average basis.
Halloween Season Off to Strong Start: During the earnings call, management noted that initial sales for the Halloween season were strong, which is a solid read for 4Q19. We estimate that Halloween-related sales were at least 4-5% Y/Y greater than in 2018.
No Incremental Tailwinds Expected from Existing Partnerships: We see HSY's current partnerships, such as Disney, to have a relatively mute effect, as they target one-time events, such as a release of the Frozen 2 movie, where the incremental top-line is usually eaten up by the marketing expenses.
China's Business is Outperforming with high-single digits in revenue growth, but we expect that segment to decelerate as much as 500 bps, depending on where the tariffs stand. For now, we are assuming the base case of tariffs staying in place through 2020, since the administration did not signal that these tariffs will be rolled back even after the Phase One deal is signed.
Expect $300 MM in Share Buybacks in 2020: We believe that approximately 75% of total share repurchases of the remaining $410 MM authorization will take place next year, with $100-$200 MM additional buybacks likely authorized. Overall, Hershey remains a strong capital return story, but we do not see this as a major needle mover for investors.
Likely Outperformance from One Brands Acquisition: While the annual run rate for One is about $100 MM, we believe that synergies with HSY may lead to incremental $20 MM for the year, mainly manifested during the second half of 2020. We do not see this as a meaningful tailwind, but it's definitely a positive.
Macroeconomic risks could lead to decreased disposable income and thus negatively impact Hershey's sales.
Reputational risks, such as potential candy recall, could weaken Hershey's brand around the world.
Competitive risks: We believe that the greatest competitive risks Hershey faces are from international brands, since confectionary tastes are very nation-specific, which makes expansion in Mexico, China, Brazil, and other emerging economies difficult for HSY.
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