Friday, 7 August 2015

Hershey: one or two bad days away from a buy level

Back in June (link here) I wrote up some thoughts on the confectionery company Hershey following their guidance shocker concluding that:

'...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'

The shares in the interim have not got back to the US$85 level...but they are getting closer today after a fourth guidance cut for FY15:


So what were the key points from the Q2 numbers?

'Price hikes boosted North America net sales by 1.8 percent to $1.40 billion in the second quarter, but volumes fell.

Sales in markets outside North America fell 12.1 percent.

Hershey cut its net sales growth forecast for 2015 to about 1.5-2.5 percent from 2.5-3.5 percent it forecast in June.

The company reported a net loss of $99.9 million, or 47 cents per share, for the quarter ended July 5, mainly due to net pretax charges of $281.9 million.

The charges included a $249.8 million non-cash goodwill impairment charge related to its Shanghai Golden Monkey business, which it agreed to buy last year'.

Unsurprisingly given the relative proximity to the June update the above was more an accentuation of the trends discussed then with distribution in China proving problematic and core US brands 'doing well'. What I found interesting was the company's positive signalling including not only the usual sort of refrain about being 'optimistic about the future' but also noting their Chinese market focus was to 'participate in growth' and the fact that the interim dividend went up 9% helping to underpin further the c.2.3% dividend yield. As @DavidLBack noted the Hershey's dividend payments have generally continued to push up attractively over recent years:


With the guidance tweaks coming at the sales level, positive trends in gross margins and the structural positives noted in my June write-up the sub US$85 level still feels like the first price to buy at.  

In other words one or two bad days away from flashing 'buy'.  On the watch list.  

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