The Hershey Company (HSY): Disappointment In The Cards?

The Hershey Company (NYSE:HSY) is slated to report first-quarter 2017 results on Apr 26, before the opening bell. Last quarter, the company posted a positive earnings surprise of 8.3%.

The chocolate maker surpassed earnings estimates in all of the last four quarters, the average surprise being 7.85%.

Let’s see how things are shaping up prior to this announcement.

Factors to Consider

Hershey’s sales have been weak since 2014 due to lackluster category trends, increased competition from the broader snacking category and soft international growth. The top-line weakness which continued in 2016 raises concern.

Moreover, the U.S. chocolate category is gradually slowing down. A shift in consumer preference toward healthier snacks like nuts and increased competition from the broader snacking category is denting demand for chocolate. Moreover, changing shopping habits in the U.S., like channel shifting and e-Commerce, are hurting the chocolate category.

To add to the woes, Hershey has been posting weak performance in international markets since 2015. International sales declined 14% (including acquisitions/divestures and currency headwinds) in 2015 and 0.5% in 2016, primarily due to soft results in China.

On the brighter side, we are encouraged to note that the company expects to see improvement in the marketplace results with profitable U.S. market, driven by innovation and larger in-store merchandising and trade support. Hershey believes its candy, mint and gum (“CMG”) is an attractive category capable of solid growth over the long term when supported with the right mix of customer and consumer marketing. Hence, the company intends to make required investments to drive growth and market share.

For the first quarter, the Zacks Consensus Estimate for earnings is pegged at $1.26, reflecting an increase of 14.2% year over year, while the consensus for revenues is at $1.90 billion, implying 3.9% year-over-year growth.

Earnings Whisper

Our proven model does not conclusively show that Hershey is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. However, that is not the case here as you will see below:

Zacks ESP: Hershey’s Earnings ESP is -0.79% as the Most Accurate estimate stands at $1.25 and the Zacks Consensus Estimate is pegged at $1.26. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Hershey Company (The) Price and EPS Surprise

Zacks Rank: Hershey’s Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies in the broader consumer staples sector that can be considered as our model shows that they have the right combination of elements to post an earnings beat this quarter:

The Coca-Cola Company (NYSE:KO) has an Earnings ESP of +2.27% and a Zacks Rank #2. The company is slated to report quarterly results on Apr 25.

Coty Inc. (NYSE:COTY) , expected to report its quarterly numbers on May 2, has an Earnings ESP of +25.0% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Newell Brands Inc. (NYSE:NWL) has an Earnings ESP of +6.90% and a Zacks Rank #3. The company is scheduled to report its quarterly numbers on May 8.

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