Lowering Price Target on Hershey Due to Weak Earnings Outlook; Reiterate Sell

6/18 - "While Hershey’s retail takeaway has moderately improved recently, we expect minimal EPS growth next year owing to further increases in brand support and commodity inflation. With further increases in advertising spending and emerging markets investment likely beyond 2009, we don’t expect Hershey to achieve its new 6-8% L-T EPS growth target before 2010. We also believe that achieving its 3-5% top line growth target will be difficult owing to weakness in the core mass-market milk chocolate category and competition in the premium segment."

"Our 12-month price target of $32 is based upon a 17x multiple on our 2009 EPS estimate, a modest premium to the current packaged food group average on 2008 estimates. While HSY’s fundamentals hardly warrant a premium multiple, market speculation about Hershey forming a growth-enhancing joint venture with a global confectionary player could support the multiple. We believe that the likelihood of HSY forming such a jv is low, however, owing to the Trust’s insistence on maintaining control and the likely lack of interest in HSY’s low-growth markets."

"We are cutting our 2009 EPS estimate from $1.92 to $1.88 based upon forecasts for greater than expected investment in brand support and higher than expected commodity costs. We are lowering our 2010 EPS estimate from $2.10 to $2.00 to reflect further increases in ad spending and emerging markets investment."