Friday, 19 June 2015

What price Hershey's then?

I wrote a piece earlier today in my Yahoo Finance Contributor's column about Hershey's China challenges.  As I noted in the article  fascinatingly the famous chocolate company made a sharply differentiated comment about the progression of sales and profits in America compared to China:

‘The company’s North America confectionery business is on track to deliver on its 2015 financial objectives…In China, Hershey chocolate growth was below expectations in April and May. As a result, the company has tempered its expectations for organic net sales and operating income growth. Macroeconomic challenges and trends are affecting consumer shopping behavior resulting in continued softness within the China modern trade, particularly the tier one hypermarkets where the company generates the majority of its chocolate sales’

Which makes me think: what price Hershey's then?

Looking at the company's statement published earlier today and, additionally, a productivity initiative release (here) which detailed personnel change and a US$100m+ charge, the company's earnings capability is going to be impacted.  As Hershey's management note:

'full-year reported earnings per share-diluted, including charges related to the productivity program announced today in a separate press release of $0.29 to $0.35 per share-diluted, is expected to be in the $3.62 to $3.79 range. In 2015, the company expects to achieve approximately 15% to 20% of the aforementioned productivity program total pretax savings of $65 million to $75 million. The company expects adjusted earnings per share-diluted to be in the $4.10 to $4.18 range, an increase of 3% to 5% versus 2014, including dilution from acquisitions and divestitures of around $0.20 per share'

So basically a 3-5% underlying EPS increase for 2015 stripping out the restructuring spend element.  No shocker for a well-known consumer brand but for a company trading on over a x14 EV/ebit multiple not the most compelling multiple and even lower than the sales CAGR over the last 5 years or so (earnings would typically grow faster than this due to operational leverage).  

This is no surprise given that whilst international sales are only c. 15% of total Hershey sales, international operations account for over 30% of total growth.  Therefore a slowdown in China does feed negatively through.  

Fortunately Hershey's has a good balance sheet including a propensity not to be shy to buy back shares. 2014's buybacks were equivalent to around 2.9% of the current market cap.  Add onto this the 2%+ dividend yield and Hershey's has not been shy to return effectively a 5%+ yield to shareholders.  That is not too shabby at all - albeit that this equates to broadly the free cash flow yield (note that the company does have a target debt:ebitda range at x1.5-2 nicely above the current c. x1.3 i.e. plenty of scope for releveraging if required.  

Thoughts then.  As noted above (and despite the solid balance sheet and cash flow situation), a x14s type multiple is not super cheap - but is not super expensive either.  Broadly speaking a sub US$85 share price is a touch below a prospective x14 EV/ebit multiple (about the right starting purchasing level for a global branded business with a good balance sheet) and a sub US$75 share price (or c. x12 EV/ebit prospectively) would be a 'double up' / augmentation sort of level perhaps reflecting further patchy shorter-term performance/conditions.  

In short, two levels to be thinking about Hershey's stock.  I have added them to my flag list.  

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