There is a lot to like about the Hershey Company and there are some current issues the company is facing that need to be addressed.


The three biggest issues the company is facing:

  1. 2H15 Domestic CMG volume performance looks aggressive but achievable
  2. Putting the Shanghai Golden Monkey acquisition in the rear view mirror
  3. Long-term growth model is under pressure from international pressures


That being said the Hedgeye Consumer Staples Dashboard is flashing positive as many of the company’s issues are being priced in:

  1. HSY has underperformed the SPX and XLP by 7.0%and 8.8%, respectively
  2. HSY is at the bottom quartile of revenue and earnings revisions
  3. HSY is trading at 78% of its 5 year P/E vs 85% for the group
  4. Short Interest is at 3%
  5. 83% of the Sell-Side have holds or sells on the stock




Snacking today is not just natural & organic or better-for-you; there is an indulgent side as well. HSY has a big advantage in this market with a lot of room to grow as they extend into other areas of snacking, such as premium jerky and macadamia nuts.



The stock hit a 52-week high in January of 2015 at around $111 per share, and is now trading well below that now at $87.08.




HSY is not a well-liked stock on the street right now, especially evident by the downward trend in the stock since January. Only 17% of the analysts have it rated as a buy, 72% rate it as a hold and 11% as a sell.




Evident by the chart below provided by Nielsen, Chocolate is a global leader in snacking even when put up against healthier options. This chart further drives home our point, snacking is not just about being healthy, it’s about enjoying yourself.



Indulgent snacking is increasing the number of claimed benefits to attract consumer trials. Claims such as fiber, energy, and vegan are leading the charge and driving consumption.




We believe that a majority of the poor stock performance can be attributed to the poor financial performance in the U.S. business as of late. Additionally, China as a whole has been struggling while only 5% of sales, managements continued investment in the region could be alarming investors. In 2Q15 overall company volumes declined -3.6%, largely attributable to price increases in the U.S. along with the aforementioned softness in the China segment. Management is adamant about turning this performance around through strategic marketing and distribution gains. We believe in the return to growth in the U.S., but remain skeptical about China in the near term.



While management stepped out of their comfort zone with the acquisition of Krave Pure Foods, it’s still snacking and we believe they are well positioned to take advantage of this brand. Jerky is one of the fastest growing premium snack segments, and this shows that Hershey is willing to venture outside of confectionary products. Another category they entered this year is nut products, with the acquisition of Mauna Loa Macadamia Nut Corp closed in February 2015. Another small acquisition, but a great tuck in brand providing additional scale outside of chocolate.


This detail on management’s interest in snacking outside of confectionary is encouraging given how many assets are available in the space. There are plenty of smaller assets out there, but if HSY wanted to make a bigger splash, one company that comes to mind is Diamond Foods (DMND). With roughly $881mm in sales through the LTM April period, it is roughly a tenth of the size of HSY. Quick math, taking into account $90mm in synergies, the deal would be $0.11 dilutive in year one and $0.01 accretive in year two. Beyond the financial aspects of the deal, fundamentally we believe this to be a great growth driver for the company in the long term as they expand their snacking portfolio.



Management’s revised outlook for the full-year 2015 appears to be achievable, calling for net sales growth of between 3.0% to 4.0% on a constant currency basis.  For the full year, the company expects gross margin expansion of 135 to 145 basis points as solid North America gains, driven by price realization, are partially offset by international softness related to the aforementioned higher direct trade rate and obsolescence in China. Additionally, as stated in June, the company expects to achieve approximately $10 million to $15 million in savings related to its business productivity initiative. The company expects adjusted earnings per share-diluted to be in the $4.10 to $4.18 range, an increase of 3% to 5% on a percentage basis versus 2014, including dilution from acquisitions and divestitures of around $0.20 per share.



A continued slowdown in Chinese consumption of chocolate could hamper the recovery in the region. Commodity price pressures in cocoa and their expansion into jerky with Krave, a heavy user of beef could increase the volatility of their ingredient basket. A shift in consumer preferences away from indulgent snacking would adversely affect HSY; we see this risk and a very low possibility. Overall the risks in our eyes are manageable, and already priced into the stock.


More to come as we further explore this company. Please call or e-mail if you want to talk through the idea.


Howard Penney

Managing Director


Shayne Laidlaw




McCullough: Sure, Ford's Sales Are Hot. Its Stock? Not So Much | $F

Earlier today on Fox Business, Hedgeye CEO Keith McCullough discussed the rise in auto sales with Maria Bartiromo, along with FBN's Sandra Smith, Dagen McDowell and Cheryl Casone.

RTA Live: September 2, 2015




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Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Keith's Daily Trading Ranges [Unlocked]

This is a complimentary look at today's Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. Click here to subscribe.

Keith's Daily Trading Ranges [Unlocked] - Slide1


Keith's Daily Trading Ranges [Unlocked] - Slide2

Keith's Daily Trading Ranges [Unlocked] - Slide3


Keith's Daily Trading Ranges [Unlocked] - Slide4

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Keith's Daily Trading Ranges [Unlocked] - Slide8

Keith's Daily Trading Ranges [Unlocked] - Slide9

Keith's Daily Trading Ranges [Unlocked] - Slide10

New Highs = Historic Lows | Resi Construction & the Cycle

Takeaway: Resi construction as a % of GDP is now 3.3%, a new post-crisis high, but also right in-line with prior cycle lows.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.


New Highs = Historic Lows | Resi Construction & the Cycle - Compendium 090215


Today's Focus: MBA Mortgage Applications & July Construction Spending


Resi Construciton Spending | New Highs = Historic Lows

The long-term mean reversion upside to new construction activity is about as conspicuous as it gets for a large-scale Macro factor. 


Yesterday’s Construction Spending data showed both Total and Resi Construction spending made new post-crisis highs in July with private residential construction rising +1.1% MoM and accelerating to +15.6% YoY (along with the positive revision to 2Q data). 


However, inclusive of the multi-year recovery, resi construction remains just 3.3% of GDP – a relative level associated with trough activity observed across 75 years of housing cycles.  The 1st chart below serves as a simple but stark reminder of the current reality and secular opportunity. 


A Note on the Housing Cycle:  A somewhat obvious but seemingly underappreciated dynamic of the current cycle is that the recovery in housing lagged the broader macro inflection by more than two years.  Given that housing was the final, pre-crisis beneficiary of an epic, multi-decade (policy) game of rotate-the-asset bubble, it’s not surprising that the subsequent recovery has been slow, choppy and broadly unimpressive.


However, Housing's unique role in precipitating and propagating the financial collapse also makes historical cycle precedents (in terms of housing's position in the temporal pattern of the archetypal cycle) less informative as an analog


In short, while we’re late or mid-late cycle more broadly, we’re somewhere closer to early-mid or mid cycle in housing itself.  The housing cycle and the economic cycle are, of course, not mutually exclusive but they can tread variant medium-term paths.



Purchase Apps | Rates Ebb, Volume Flows

The MBA’s high frequency purchase application data showed demand rising to close out (what had been) an uninspiring August. Purchase demand rose +4.1% WoW and accelerated to +24.8% YoY – the fastest year-over-year rate of growth YTD – and comps remain easy through the balance of 2H.  On a QoQ basis, purchase activity is currently tracking -1.2% sequentially.  


Rates on the 30Y FRM were static at 4.08% in the latest week, holding at 3-month lows.  At current interest rates, affordability remains +4.2% better than the 2014 average and sits as a modest tailwind for HPI.   



New Highs = Historic Lows | Resi Construction & the Cycle - Resi Construction    of GDP


New Highs = Historic Lows | Resi Construction & the Cycle - Construction Spending Table


New Highs = Historic Lows | Resi Construction & the Cycle - Purchase index   YoY Qtrly


New Highs = Historic Lows | Resi Construction & the Cycle - Purchase YoY


New Highs = Historic Lows | Resi Construction & the Cycle - Purchase   refi YoY


New Highs = Historic Lows | Resi Construction & the Cycle - Purchase 2013v14v15


New Highs = Historic Lows | Resi Construction & the Cycle - Purchase LT


New Highs = Historic Lows | Resi Construction & the Cycle - 30Y FRM 




About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.



Joshua Steiner, CFA


Christian B. Drake


WSM | Cat Out of the Bag, But Still Expensive

Takeaway: Here's a quick summary of where we stand on WSM, as well as links to our 90 page Home Furnishings Black Book and video presentation.


Slide Deck: CLICK HERE

Video Replay: CLICK HERE


Here's a quick summary of where we stand on WSM, as well as links to our 90 page Home Furnishings Black Book and video presentation.


WSM  |    Cat Out of the Bag, But Still Expensive  - wsm chart1


CONCLUSION: There’s nothing structurally broken here (nothing major, at least). This is a good company with a portfolio of above-average quality brands. But growth is absolutely slowing here – not just cyclically, but also secularly. This should half the EPS growth rate into the mid-single digits (without an acquisition), and take down WSM’s industry leading returns. At a 15x multiple, we wouldn’t care, especially given that the company just rightsized the upcoming quarter’s expectations last week. But at almost 22x earnings when we’re looking for growth of 8%, we simply think this is too rich.


What We Like:

a) The core Williams-Sonoma brand is extremely defendable.

b) West Elm scores very well on our consumer surveys. It’s like a down market RH – and there’s a market for that.

c) DTC stands at 50.5% of total, which is the highest in all of retail except for pure play e-tailers like Amazon and Wayfair. d) WSM has a demonstrated history of buying back stock.

What We Don’t Like:

a) The core brand only accounts for 21% of sales.

b) West Elm should have 87 stores by the end of the year. We think there are only about 120 markets in the US that make sense for WE.

c) WSM is not ‘channel agnostic’. It is set up in a way where Retail competes against DTC for the same sales dollar. It works for now, but we don’t like it.

d) When net income growth reverts down to the 7-8% range, the company is likely to cut its repo activity in half unless it levers up to support it.

e) Ultimately, we think that the balance sheet will be put to use to make an acquisition – a late-cycle move to get growth going. We’re actually not against this at all for WSM assuming the deal is right, which is odd for us to say.    


WSM  |    Cat Out of the Bag, But Still Expensive  - WSM chart2 

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