Citi Sees Hershey Co Headed For 'Inflection' In Sales, Margins

Hershey Co HSY is poised for a comeback after higher costs for ingredients and slowing sales hammered the stock earlier this year, an analyst said Tuesday.

As Halloween candy starts to pile up at the nation's supermarkets, Citi's David Driscoll said the rate of sales growth at the nation's largest chocolate maker will double in the second half of 2014.

Driscoll said Hersey is Citi's "top pick" given its relatively low stock price and what Driscoll sees as a coming "inflection" for both sales and margins. Driscoll's target price is $112.

Hershey shares have fallen nearly 12 percent in the past six months.

Chief Executive John P. Bilbrey told analysts in July that an eight percent price hike is necessary to protect profit margins. Bilbrey said as a result of higher prices, sales in the second half of 2014 and 2015 would decline.

In its most recent 2014 outlook Hershey told investors to expect 2014 net sales growth at "the low end of its long-term 5 to 7 percent target" with a narrower gross margin compared with 2013.

But Driscoll said that at a recent, private meeting, Hershey managers he didn't identify "expressed confidence in the company's ability to produce accelerating revenue growth over the second half of 2014."

As for the price increase, much of which becomes effective for the first time in 2015, Driscoll said it won't hurt earnings.

Hershey took comparable pricing action in 2009 and 2012, Driscoll said, adding that during each of those periods, earnings grew 15 percent.

Driscoll said Wall Street's 2015 estimate for 10 percent earnings growth is too low because it incorrectly models gains from margin increase resulting from the price hikes.

Hershey traded recently at $93.77 a share, up more than one percent.