Halloween is around the corner, my friends. I love this time of year. And you can bet Hershey (NYSE: HSY) does, too. Will the company sell a lot of candy to all those households who want to give some treats out? Let's hope so, because Hershey needs all the help it can get. It hasn't been growing too well, lately. (I'll be helping out by buying a bag of my favorite, the Reese's Peanut Butter Cup!)
The confectioner reported earnings on Thursday for the third quarter. Sales rose a modest 6% to roughly $1.5 billion. Adjusted earnings per diluted share came in at $0.64. That unfortunately represented a 6% decrease in the bottom line. Furthermore, if you're in the mood for more bad news, adjusted margins dropped across the board during the reporting period. And we can't look to an earnings beat to make things better. According to this article, Hershey managed to only equal analyst expectations, not beat them.
Yet, the stock is up well over 2% as of this writing. As the article pointed out, Hershey is doing okay in terms of market share and outlook. And I'll say this: long-term investors can look at the dividend yield on the stock and the brand equity behind the famous candy maker as positives. I just have to wonder how the stock is going to fare as the consumer continues to become affected by price increases at the supermarket. We all know that Hershey, along with other companies such as Kraft (NYSE: KFT) and Campbell Soup (NYSE: CPB), have found it difficult to spare their consumers the sting of rising costs in a softening economy. Hershey's shares are currently near a 52-week low. My instinct at this time says they'll be going lower still. If you're into dollar-cost-averaging over a long period of time (which would be a good strategy vis a vis this company), then I'd say that you'd be fine here. However, I don't think Hershey will break through to record highs anytime soon.
Disclosure: I don't own any company mentioned; positions can change at any time.
I remember when Rocky Mountain Chocolate Factory (NASDAQ: RMCF) was a cool stock. Unfortunately, that was then and this is now. The economy is horrible, and it's getting worse. Rocky Mountain is not the company with which to ride the storm out.
The third-quarter earnings report, issued on Thursday, showed terrible data. Revenues declined well over 16% to $6.3 million. Earnings per diluted share took a big drop of 30%, coming in at $0.14. And it doesn't stop there. Comps for franchised outlets dipped over 2%. Same-store pounds of products bought by franchisees dropped 10%. Let's face it, people are cutting back on Rocky Mountain's confections. I'm sure they're delicious, but it just doesn't matter. Rocky Mountain is going to continue to struggle as we make our way through this macro mess. Management points out that the stock does pay a dividend of $0.10 per quarter. That gives a yield, as of Thursday's closing price, of just about 6%.
That's not bad, and I suppose if you're a long-term value investor who has extremely solid patience, you might want to take a look at Rocky Mountain's shares. I mean, we all know that equities are pretty irrationally priced these days. But, would I step in and buy the stock as any sort of defensive position for my portfolio? No way. I think it's headed lower. And besides, if I wanted to step in and buy something related to confectionery pleasures, I'd probably consider Hershey (NYSE: HSY) first. Not only am I a big fan of the Reese's peanut butter cup, but I perceive the portfolio controlled by Hershey to be a lot more valuable in these troubled times than Rocky Mountain's line of products. Let's hope all the Halloween trick-or-treaters out there are gearing up to help out the confection industry at the end of this month by demanding a whole lot of treats. Goodness knows, the market has already had its share of tricks this year.
Disclosure: I don't own any company mentioned; positions can change at any time.
Should those who own shares of Kraft immediately put an order in to dump the stock? Well, shareholders know what is best for them and their specific situations, but if you want my opinion, I don't think Kraft is a sell.
For starters, that $1.88 per share figure represents an adjustment related to the sale of the Post cereal asset. It therefore doesn't bother me too much. And as for the 2009 estimate, Kraft's $2-per-share guidance includes a $0.03 charge for the Post-cereal exit and monies devoted to cost savings. Analyst estimates for the most part don't factor adjustments into their bottom-line figures. So, this guidance doesn't really frighten me.
What I think is more telling is the issue of margins. Consumer-products companies such as Hershey (NYSE: HSY), Procter & Gamble (NYSE: PG), Kellogg (NYSE: K) and PepsiCo (NYSE: PEP) all have margins on their corporate minds. From what I can tell, Kraft has been pretty successful at protecting itself from inflation by utilizing price increases.
Heinz (NYSE: HNZ) beat analyst expectations, and mine for that matter, when it released its first-quarter report on Thursday. Wall Street was looking for about 66 cents per share on the bottom line. Heinz delivered 72 per cents share, a figure that represents a 14% growth rate. This was achieved with the help of a 15% rise in top-line sales.
Management mentioned that organic sales were aided pretty evenly by volume growth and pricing strategies. Looks like brand equity wins the day yet again. People are simply willing to pay for their name brands. This isn't to say that generic, private-label items won't always be a concern for companies like Heinz, as well as competitors such as Hershey (NYSE: HSY), Kraft (NYSE: KFT), Campbell Soup (NYSE: CPB), PepsiCo (NYSE: PEP) and General Mills (NYSE: GIS). They always will be.
Heinz is proving to be one heck of a defensive business during this tough recession. The only segment where the company is having problems is in its U.S. Foodservice where sales and operating income declined. Not so surprising, I suppose, since some restaurants are having trouble getting patrons through the door. People may be willing to spend for Heinz ketchup in the supermarket, but if they're not willing to go to the local casual-dining hangout, then those places won't be demanding as much Heinz ketchup for their tables.
Heinz (NYSE: HNZ), famous maker of thick-and-rich ketchups and other foodstuffs, is due to report first-quarter results on Thursday. So, what might be in store for the company? Are we looking at a lot of growth for the bottom line?
Well, according to Earnings.com, analysts aren't looking for much growth at all. Last year at this time, Heinz served up 63 cents per share. Wall Street seems to be looking for three measly pennies of growth! Can Heinz beat the 66 cents per share that analysts believe it will report?
Looking at some past price history, I can't say that I'm overly optimistic that Heinz will beat the expectations by too much (if it beats at all, that is). Remember that consumer-products companies are having one heck of a time with inflation. Raising prices is key to survival, but those higher price-tags must be accepted by the consumer base.
Increased marketing spending also is important during times like these since many businesses want to see if they can capture some market share while the competition is hurting.
So investors will want to carefully evaluate the margins and volume of sales when Heinz issues its earnings release. This has been par for the course for businesses such as Hershey (NYSE: HSY), Kraft (NYSE: KFT), Campbell Soup (NYSE: CPB), PepsiCo (NYSE: PEP), and General Mills (NYSE: GIS).
Kraft (NYSE: KFT) had one heck of a second quarter. It was a lot better than I thought it would be. As Melly Alazraki reported in her Before the bell post on Monday, Kraft managed to demolish analyst expectations by delivering 58 cents per share to the bottom line, a number that no only represented a 16% growth but that was 8 cents better than what Wall Street analysts were looking for. Overall, net revenues soared over 21%, while organic-revenue growth came in at roughly 7%. Not bad at all.
Even with the hellish inflation of input costs dogging it, Kraft managed to engage a price-increasing strategy that not only defended the bottom line but helped it thrive. How could it do this? Brand power, my friends. Looks like investors underestimated that power, and the fact that people are willing to pay more for the things they love.
Of course, it might be understandable that investors would not be willing to credit Kraft and its portfolio with such earnings-beating potential considering that there's so much competition out there from generic brands and that fuel costs are eating into supermarket budgets. Yet, the numbers support Kraft's current strategies. Volume wasn't too negatively affected in my opinion, and the margins turned out to be just fine -- something investors love to see when inflation is out front every single day in the headlines.
On Monday July 28, Kraft (NYSE: KFT) will be reporting its earnings results for the second quarter. Kraft is a well-known manufacturer of supermarket foodstuffs. We all know the brands: Oreo cookies, Nabisco, Oscar Meyer and many, many others.
It should be a defensive stock, just like Campbell Soup (NYSE: CPB) or PepsiCo (NYSE: PEP), right? Well, it is and it isn't. It's defensive in the sense that, as the cliche goes, people still want to eat their favorite foods even during recessionary times. It isn't in the sense that the stock is down by 16% (as of this writing) in the one-year time period. It does have a nice dividend yield, however, and Warren Buffet seems to like it.
What should investors be looking for on Monday? Well, they should definitely be looking at the margins. Is Kraft navigating this inflationary period in as efficient a manner as possible? I think Kraft will do OK in this regard. I'm not expecting any sort of wide expansion of gross margin, but I think management will report stability in this area.
Hershey (NYSE: HSY) , which recently reported numbers for its own quarter (see Brent Archer's idea for a trade involving Hershey options), did well in keeping margin-erosion at bay. Hershey also beat estimates by a penny. Considering that Kraft beat analyst estimates last quarter, that it has a good history of going beyond expectations and that Hershey was able to beat, then I would have to say that Kraft should have no problem beating on Monday. Hershey has had its share of troubles lately, keep in mind.
Again this week, in a list of earnings expectations for some prominent companies in a variety of sectors, we see an apparent optimism. That is, analysts are anticipating more earnings growth than earnings declines.
Analysts surveyed by Thomson Financial expect the following companies to report a rise in earnings when compared to the same period of the previous year.
This post is part of our Big Company, Small Town series, featuring large companies and the small towns in which they are headquartered.
One might assume that chocolatier Hershey Company (NYSE: HSY) got its name from the small Pennsylvania town it is located in, population 12,771. However, the truth of the matter is that the company is named after its founder, Milton S. Hershey, and that the town, which was formerly known as Derry Church, was renamed Hershey, Pennsylvania, in 1906 because of the popularity of the chocolate.
Milton Hershey built the milk processing plant he would use to make his milk chocolate in 1896 with profits he made from selling his caramel company, and three years later, in 1899, the "Hershey process" was born. In 1903, Hershey began construction of a chocolate plant in what would later become Hershey, Pennsylvania. The manufacturing plant, which now covers over two million square feet of manufacturing space, is now the largest chocolate factory in the world.
Just as important to the town's prosperity as the chocolate manufacturing plant is Hersheypark, an amusement park that is affiliated with the Hershey Company. The theme park is a huge employer for the town, a tourist attraction, and a branding device for the Hershey brand.
Hershey, Pennsylvania is truly a place where the company and the town have merged into a single identity. While there, you can tour Hershey's Chocolate World, Hershey Museum, and visit Hersheypark, all of which feature the history of both the company and the town, which will be forever intertwined.
Hershey (NYSE: HSY) is having growth problems. Not only is it tough just navigating this high-inflationary period, but it's difficult keeping up with the competition. Consumers have a lot of candy choices, and even though Hershey is a big brand name in confections, it thinks it can do better in the marketing department. According to thisWall Street Journal (subscription required) piece, Hershey intends on implementing a 20% increase in spending for promotions.
This double-digit jump in marketing is a smart move, but it won't be easy to digest. With the aforementioned inflationary pressures on the rise, Hershey is going to be sufficiently challenged to push growth while balancing the upward trends in input costs. But is there really a choice here? When you have a super brand like Hershey running into trouble, the thing you need to do is get out there and prop up the inherent equity of the product portfolio.
Yet, there's a bit of a conundrum here, I think. Hershey needs to get people to buy its delicious candies (I'm certainly a fan of the awesome Reese's Peanut Butter Cup). Which demographic loves sweets? Younger kids. They would have represented a great group for growth opportunities, but Hershey has to be careful about marketing too much to this demo since the country has, rightly so, been focusing on healthy alternatives to fatty foods. Even though Hershey has been trying to make some of its portfolio healthier, the flagship brands will always be, one assumes, sugary and full of empty calories. In fact, Hershey is more than aware of this issue, as this corporate link demonstrates.
Steven Spielberg and his DreamWorks Animation SKG Inc (NYSE: DWA) partners are close to signing a deal with India's Reliance ADA Group for between $500M and $600M that would provide financing to the company as it prepares to leave Viacom Inc's (NYSE: VIA) Paramount Pictures this year, the Wall Street Journal reported. DreamWorks will seek to obtain an additional $500M in debt financing to make about six new films a year.
The Wall Street Journal also reported that at an investor update yesterday, The Hershey Company (NYSE: HSY) CEO David West said the chocolate-bar maker would boost spending on marketing about 20% this year and next, and slightly increased the company's long-term annual sales targets. West offered little detail on how Hershey will address its reliance on the U.S. market for revenue.
OTHER PAPERS:
The Economic Times reported that India's Maneesh Pharmaceuticals, a mid-sized company, bought a 51% stake in U.S.-based Synovics Pharmaceuticals Inc (OTC: SYVC). The terms of the deal were not disclosed.
The Economic Times also reported that General Electric Company's (NYSE: GE) GE Money Financial Services, which was seeking a parter for its personal and home loan portfolios, may have called off the process after it was unable to get the right valuation.
Bob Nardelli, the chairman and CEO of Chrysler LLC, sent a memo to employees warning them of worsening U.S. sales, the Detroit News reported. The e-mail did not indicate the auto maker would look to soon further cut production or lay off staff, a person familiar with the matter said.
Talk about a tough time in the markets. Between the financial crisis and oil prices rising on an almost daily basis, with the Fed damned if it raises rates and damned if it doesn't, the floods in the Midwest are now threatening to make a trip to the supermarket much more expensive. Yes, break out the coupons and pray for sales, because, according to The Wall Street Journal [subscription], food prices are destined for one direction: higher. That's because a lot of farmland has been damaged, throwing the supply-demand dynamic into chaos.
What does this mean for investors? Look for potential pressure on the stocks of companies such as Coca-Cola (NYSE: KO), PepsiCo (NYSE: PEP), Kraft (NYSE: KFT), Kellogg (NYSE: K), General Mills (NYSE: GIS), and Hershey (NYSE: HSY). I happen to own Coke, and I've heard the news reports talking about how higher corn prices will affect Coke and Pepsi because they use corn syrup as an ingredient for their sodas. It's also been pointed out by others that PepsiCo owns Frito-Lay, and since that company manufacturers salty snacks such as Doritos and Tostitos (I love them both), corn prices will also have an impact on that division.
If you're a trader, be wary. We might be in for a rough ride this summer with not only the stocks I've mentioned here, but in a general sense. Since I own Coke, I've been acutely aware of the pullback experienced in that stock as the external pressures surround it. As I write this, the stock is trading at $54.27. The shares were over $65 during their wonderful stay at the 52-week-high suite. So, yes, buyers with short-term mentalities must be wary. However, long-term investors should look upon any pullbacks as potential opportunities for some of these food-selling companies. If you don't intend to trade, then adding to a Coke or Pepsi position might make sense.
Disclosure: I own Coke; positions can change at any time.
Here are some highlights from this past week's 
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Talk about a tough time in the markets. Between the financial crisis and oil prices rising on an almost daily basis, with the Fed damned if it raises rates and damned if it doesn't, the floods in the Midwest are now threatening to make a trip to the supermarket much more expensive. Yes, break out the coupons and pray for sales, because, according to 
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