JP Morgan Upgrades Hershey To Overweight Amid New Valuation Methodology in Packaged Food Sector

• Hershey Co HSY shares have lost 14 percent year-to-date, declining steadily since January 22.
• JP Morgan’s Ken Goldman upgraded the rating for the company from Neutral to Overweight, while raising the price target from $90 to $100.
• China’s contribution to Hershey’s business has declined and the company’s strong domestic performance is expected to continue, Goldman said, while noting that a new valuation methodology had been introduced.

Analyst Ken Goldman said that Hershey’s risk/reward is “attractive once again.” China now accounts for only 2-3 percent of the company’s business. Thus, the focus has shifted back to the US, where revenue trends are robust and gross margin expansion likely in 2016.

Goldman believes that Hershey would be able to boost its earnings via M&A, and likely generate a “relatively attractive” total shareholder return of 14 percent “between now and the end of next year.”

JP Morgan noted, “We also are introducing a new valuation approach for all of our packaged food stocks, based on scenario analyses, in which we conclude that we still prefer stories with organic growth over those with upside potential from M&A and/or activism, all else equal.”

Goldman believes Hershey’s growth is unlikely to return to the high rates generated earlier this decade. In fact, organic growth could remain below 3 percent going ahead. The analyst noted, however, that even 3 percent is higher than the average for the packaged food group, while adding that Hershey’s returns on capital remains “best in class.”

The price target revision reflects a rollover to December 2016 from December 2015, the report stated.