Hershey’s Sweet Outlook Will Satisfy Your Craving For Dividends And Growth
The Hershey Company (NYSE:HSY) Q1 results are a great example of what we like so much about the consumer staples sector. Like so many in the sector, Hersheys has itself positioned for growth while giving value and paying a nice dividend. When it comes to the deepest value and highest yields in the group Hershey is neither but what it is is a nice blend of value and yield in a company further along in its transformation than others. And it’s a Dividend Aristocrat on track to hike its dividend later this summer.
The Hershey Company Issues Goldilocks Report
The Hershey Company Q1 report is about as good as it gets when it comes to corporate earnings. Even with the impact of rising costs the company was able to grow revenue to record levels, grow its earnings YOY versus a tough comp, expand its margins, and leverage itself into double-digit earnings growth. The $2.29 billion in consolidated revenue is up 12.7% from last year, 4.5% sequentially, and beat the consensus by 850 basis points. The beat is substantial and more so because the analysts have been slowing creeping their estimates higher since about this time last year.
The gains were driven by an 11% increase in volume that was compounded by a 1.9% favorable impact from price and mix. Organic sales were offset by a small 0.1% impact from both divestiture and FX. Moving down to the margins, both the gross and operating margins widened by triple digits over the past year but there is a caveat. At the gross level margins widened by 320 basis points under the influence of mark-to-market commodity gains but on an adjusted basis gross margin shrank because of rising commodity costs. The good news is the company is well-positioned for the commodity market and able to leverage other areas of the business. On an adjusted basis, the EPS of $1.92 is up 17.2% from last and beat the consensus by $0.12.
Guidance for the coming year is favorable as well. The company says increasing mobility is providing a tailwind for business that has elevated its outlook for both revenue and earnings. The company upped its guidance for revenue growth to 4% to 6% from a range of 2% to 4% and expects adjusted EPS to grow 8% to 10% versus the 6% to 8% previously guided. What we take from this is the company is optimistic but cautious and forecasts earnings leverage over the next three quarters. We think the company will outperform this guidance and possibly increase it again later in the year.
Hershey Is A Tasty Value With Solid Yield
Hershey isn’t the highest-yielding consumer staple and it isn’t the cheapest but it is a value with a good yield. Trading at roughly 22X and 21X next year’s earnings the company is in the middle of the range as far as valuations go and pays about 2.0% in yield. The highest-yielding consumer staples like Kraft pay closer to 4.0% with a 15X valuation while the lowest like Lamb Weston are trading closer to 36X earnings with a yield near 1.0%. The takeaway here is that Hershey gives a good value for dividend-growth investors and comes with a safely growing yield. The company has been increasing for 29 years and is on track to make it a 30th later this summer. Based on the earnings outlook, cash flow, and balance sheet we think the next increase could be above average in size bordering on double-digits.
The Technical Outlook: The Hershey Company Makes A New High
Shares of The Hershey Company surged more than 4.0% following the Q1 earnings report to break out to a new all-time high. The move is accompanied by mixed indicators that are consistent with support at the moving average if not the precursor to a strong buy signal. If the market follows through on this move we think shares of HSY could continue higher for the next two to three months and hit a target in the range of $176. If the summer is as strong as we think it could be, $176 will lead to much higher gains by the end of the year. Just think about all those ice cream cones, toppings, candy bars, and snacks waiting to be gobbled up.
