BofA Double-Downgrades Hershey, Warns Nielsen Data Shows Chocolate Not Recovering

Bank of America Merrill Lynch’s Bryan D. Spillane believes there are a lack of catalysts in the near term that could drive up the estimates or the stock valuation for Hershey Co HSY. The analyst downgraded the rating on the company from Buy to Underperform, while lowering the price objective from $95 to $92.

“As 2016 progresses, our expectations have moderated due to a sluggish start to US chocolate sales, a slower-than-expected pace of improvement in the company’s cost structure in China and the likely need for reinvestment,” Spillane explained.

For the long term, Spillane believes Hershey has a robust franchise across attractive categories, although it might take longer than earlier expected for the company to return to a more normalized growth rate.

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According to the Bank of America report, “Recent Nielsen scanner data show that US chocolate volumes, particularly for HSY, are not recovering from 2015 price increases as quickly as we would expect.”

The analyst also expressed concern regarding the pace of profit improvement in China, with Hershey’s International segment having lost $100 million in 2015.

“Restructuring the cost base can have a meaningful impact on operating profits, although this will take time,” Spillane cautioned.

In addition, management indicated that it intends to look at acquisitions in adjacent categories in order to increase its share of the U.S. snacking market.

The EPS estimates for FY16, FY17 and FY18 have been lowered to reflect “slower top-line growth and higher spending to reaccelerate US sales.”