Downgrades, Lowered Guidance Hurt Hershey Shares

Thursday, 7 Dec 2006 | 2:02 PM ET

Hershey shares fell after analysts downgraded the stock and the confectioner lowered earnings guidance for this year and next.

Hershey also admitted it needs to revitalize its core brands.

Hershey's guidance late Wednesday triggered earnings estimate cuts and two downgrades on Wall Street. Goldman Sachs lowered its rating to neutral from buy and dropped the stock from its Americas Investment Buy list.

Merrill Lynch went to neutral from buy, adding that "we are not going to a sell rating as we expect the shares to be roughly flat over the next 9-12 months as the market begins to price in prospects for improved results in 2008."

But Merrill lowered its 2007 EPS estimate to $2.55 from $2.70 and its 2008 estimate to $2.78 from $2.95.

"Meltdown" was how Credit Suisse headlined its note to clients, saying that the company "has disappointed and excused its way through 2006." It called the year "a disaster relative to expectations and historical (Hershey) growth rates" and trimmed its target price on Hershey stock to $56 from $58.

Citing "slower-than-anticipated improvement in U.S. marketplace trends and the financial impact" from a product recall and temporary plant closing in Canada, Hershey management lowered current-year sales guidance to "slightly below our long-term 3%-4% range."

It also said that while 2007 sales should be within that range, per-share earnings from operations should be up 7% to 9%, which is below its long-term rate of 9% to 11%.

"Our No. One goal is to restore Hershey's performance to the levels that we've achieved in the past," the company said in a news release. It also said that while revitalizing "iconic brands" is a "key priority," Hershey also was pursuing "attractive sources of growth" in "selected high-potential global markets."

J.P. Morgan Securities cut its 2006 EPS estimate to $2.40 from $2.48, 1 cent below the average of analyst expectations reported to Thomson First Call. Morgan also lowered its 2007 forecast on Hershey to $2.56 from $2.68, 1 cent below the average of expectations.

Analyst Pablo Zuanic said he faulted Hershey Chief Executive Richard Lenny on several fronts including "cost cuts have led to a bare-bones advertising budget," the company having a "excessive reliance on line extensions" and "a trial-and-error approach to snacks" that hasn't produced significant gains.

Bear Stearns, which recently upgraded Hershey to outperform on the belief that dark chocolate products would become a growth driver, said that despite Wednesday's announcement, "nothing we have seen dissuades us from maintaining this belief."

The brokerage's analyst, Terry Bivens, said after an anticipated "dip" in the stock Thursday "we see a positive trend...mostly because of dark chocolate." Bivens said that often "fallen stars in the food group can bounce back on even the slightest of positive news."

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