Hershey Stock Up 40% YTD: Will Momentum Continue In 2020?

The Hershey Company (NYSE:HSY) is well-positioned for 2020, given its solid focus on innovation, yielding buyouts, efficient pricing strategy and other efforts to boost efficiency. These factors helped this Zacks Rank #3 (Hold) stock showcase a solid run this year despite cost-related headwinds and adverse currency movements. Notably, Hershey’s shares have surged 40% year to date, outperforming the industry’s growth of 36.7%.

Let’s take a closer look at the factors working in favor of this renowned chocolate manufacturer and whether these will help maintain the momentum next year.

Factors Shaping Hershey’s Growth Story

Hershey regularly brings innovation to its core brands to meet consumer demand. In this respect, Hershey's Gold and Reese's Outrageous, launched in 2018, have been doing well. Further, the launch of Reese's Thins is drawing customers’ attention. The company also relaunched the Take5 brand under the Reese's banner. The launch of Kisses brand in India is also reaping benefits.

Further, Hershey has been undertaking buyouts to augment portfolio strength and boost revenues. Evidently, net impact from buyouts and divestitures boosted sales growth by 1.2 points during the third quarter of 2019. Notably, Hershey acquired Pirate Brands in September 2018 to bolster its snacking business. Additionally, the company has been gaining from Amplify Snack Brands, which was acquired in January 2018 to expand in the snacking category.

With several plans rolled up its sleeves to further strengthen the Amplify brands, Hershey expects greater yields from this buyout in the forthcoming periods. Another significant addition to the company’s better-for-you snacking business is ONE Brands, LLC. The buyout was completed in September 2019 and is likely to bolster the company’s nutrition bar category. Management expects sales worth nearly $25 million from this buyout in the fourth quarter. In August, the company announced minority investments in Fulfill Holdings and Blue Stripes and the businesses are slowly picking up in the snacking arena.

Hurdles Likely to be Countered

Hershey witnessed higher advertising and related consumer marketing expenses in the third quarter, due to increased advertising spending in North America. Moreover, high advertising expenses in the region, as well as increased incentive compensation, exerted pressure on the company’s adjusted operating margin, which declined 30 bps.

Although a persistent rise in such expenses poses a threat to margins, we commend Hershey’s focus on the Margin for Growth multi-year program. This program is intended to improve overall operating margin through supply-chain optimization, streamlining the operating model and reduction of administrative expenses. These moves are anticipated to boost efficiency, leverage global shared services and common processes, and increase capacity utilization. Apart from this, Hershey’s SKU rationalizing efforts and strategic pricing initiatives bode well.

Low international presence was also a limiting factor for Hershey. However, keeping in mind its weak international presence, the company has been accelerating its business in key markets like China, India, Brazil and Mexico where consumer spending is favorable. Hershey is slowly activating its core brands in these markets. Constant-currency organic sales in Mexico, Brazil, China and India cumulatively increased 7.4% in the third quarter of 2019.

Nevertheless, considering these factors, Hershey is likely to continue being in investors’ good books.

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