Street Turns Sour on Hershey Shares

Investors sold the candy maker's stock after it announced lower-than-expected third quarter sales growth

No treats for Hershey(HSY) shareholders on Oct. 19: The stock dropped after the Pennsylvania candy maker reported disappointing earnings in the third quarter.

Hershey, which owns various brands ranging from Reese's to Twizzlers, reported net income from operations of 78 cents per share, compared with 72 cents per share one year earlier. The mean analyst estimate had been for 80.9 cents per share, according to the San Francisco investment research firm StarMine.

After the news investors trimmed nearly 5% off the share price to $50.09 in afternoon trading on the New York Stock Exchange.

"Following a period of sustained in-market success, we experienced a slowdown in consumer takeaway and thus, a loss of market share," said Hershey chief executive Richard H. Lenny.

The company also said net sales during the quarter amounted to $1.41 billion, up 3.3% compared with $1.37 billion for the third quarter of 2005, as Halloween shipments get off to a decent start.

But market players had expected more. Standard & Poor's, for example, had forecast 4.5% sales growth. (S&P, like, is owned by The McGraw-Hill Companies.)

"While Hershey is responding to a sales slowdown with new products and increased marketing investments, we see higher costs hurting earnings in the fourth quarter," Standard & Poor's analyst Richard Joy said in an Oct. 19 research note. After slashing 2006 and 2007 earnings estimates, Joy reduced his 12-month target price on the stock by $11 to $56 per share. He also lowered his opinion to buy from strong buy.

Hershey plans to regain its momentum in the marketplace this year by focusing in areas such as customer support, while also leveraging core brands and introducing new products. It announced on Oct. 19 its acquisition of Dagoba Organic Chocolate, LLC, which Hershey hopes will extend its reach to consumers "seeking a superior chocolate experience."

Lenny is expecting his company's net sales growth for 2006 to be within his long-term 3-4% range. The increase in diluted earnings per share from operations will be slightly below 9-11% expectations, the company said in its press release.

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