In a recent report, analysts at Citi Research explained why they decided to remove Hershey Co HSY 1.13% from their U.S. Focus List. Despite the move, analysts remain bullish overall on the stock.

Easter Adjustments

Analysts believe that the early Easter holiday in 2015 will weigh heavier on Hershey’s Q1 earnings than previously expected, and they are reducing their Q1 earnings per share estimates by $0.03 to $1.17. However, analysts see this change as a shift in earnings rather than an overall reduction, and maintain their full-year EPS estimate of $4.45, $0.10 higher than consensus estimates.

Q1 Weakness

The major motivator behind removing Hershey from Citi’s Focus List is weak Q1 earnings and margins projections. Analysts believe that the benefits of Hershey’s Q1 price increases will come later in the year and project a 145 bps increase in full-year 2015 gross margins. “We continue to like HSY shares and see strong acceleration in margins and EPS following 1Q15, as HSY’s pricing phases in,” analysts explain.

Bull Case

The report includes analysts’ four-point bullish case for Hershey:

• Despite a 5 percent pricing increase in Q1, chocolate volumes remain flat, indicating that the market has digested the higher prices.
• Hershey gained 50 bps of U.S. market share in Q1.
• Dairy costs have dropped more than 30 percent in the past year, easing margin pressures.
• The Ice Breaker Cool Blast Chews launch coming in Q2 could provide a revenue boost.

Outlook

Analysts believe that any weakness in share price following the release of Hershey’s Q1 earning report should be considered a buying opportunity.

Citi maintains its Buy rating on Hershey and has a $120 target for the stock.

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