Hershey Media Report 10/26/16

National Coverage

1. Mondelez International Earnings -- What to Watch

   Oct 25, 2016 | Wall Street Journal

   By Annie Gasparro
   
   
   Brief mention of the rejected bid from Mondelez. Relevant portion highlighted below.

Trade Coverage

2. Hershey Investors Crave Takeover Bid

   Oct 25, 2016 | Benzinga

   By Manikandan Raman
   
   
   Alexia Howard of Bernstein doesn’t expect much upside in the shares of Hershey Co HSY following the withdrawal of Mondelez International Inc MDLZ 's bid and weakness in the U.S. chocolate category as consumers are becoming more health conscious and avoiding added sugar.
3. Candy Crushed: What's Next in the Merger Saga of Confectionery Giants

   Oct 25, 2016 | The Street

   By Bob O'Brien
   
   
   The approach of Halloween represents an opportune time to check in on the confectionary business. Just as you can be assured that somebody ringing your doorbell the last day of this month is going to be outfitted as Donald Trump, the final two months of the year are going to see the resuscitation of talk of mergers in the branded products sector, including among candy makers.

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National Coverage

1. Mondelez International Earnings -- What to Watch

   Oct 25, 2016 | Wall Street Journal

   By Annie Gasparro

   Mondelez International Inc. is scheduled to report its second-quarter earnings before the market opens Wednesday.

   Here’s what investors expect:

   EARNINGS FORECAST: Analysts forecast adjusted profit of 43 cents a share, according to Thomson Reuters, compared with 42 cents a year earlier.

   REVENUE FORECAST: Revenue is expected to be $6.45 billion, down from $$6.85 billion last year.

   WHAT TO WATCH:

   --WHAT’S NEXT: Mondelez Chief Executive Irene Rosenfeld is closely watched by Wall Street, after making a bid for rival Hershey Co. over the summer and then dropping its pursuit of the chocolatier last month. Ms. Rosenfeld has reiterated that she doesn’t need a major acquisition like that to reach her goals of stronger profit margins and sales growth. But some expect Mondelez to pounce elsewhere, possibly as a defensive move to weaken the chances that it taken over by a bigger firm. As such, clues in either direction will be gobbled up by hungry investors.

   --CHOCOLATE WAR: Mondelez, which makes Oreo cookies and Ritz crackers and more, is making a major push into the U.S. chocolate market with its Milka brand, popular in Europe already. On the heels of a failed attempt to buy Hershey, Mondelez is coming out with a Milka chocolate bar that has Oreo cookies in it. Meanwhile, Hershey is coming out with its namesake chocolate bar penetrated with bits of cookie. The battle to capture more share of America’s chocolate habit has intensified, and investors will be looking for Mondelez’s early results to indicate the company’s chance at success.

   --THE MONDELEZ FACTOR: Mondelez, though not a household name, is one of the world’s largest food makers, with brands like Oreo and Cadbury stretching from established to emerging markets around the world. Its global breadth gives the company economic insight and has made it a good indicator of disposable income in emerging markets. The investment community will be awaiting broader feedback from Mondelez executives regarding the global economy, on the call with investors and analysts scheduled for 10 a.m. ET.

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Trade Coverage

2. Hershey Investors Crave Takeover Bid

   Oct 25, 2016 | Benzinga

   By Manikandan Raman

   Alexia Howard of Bernstein doesn’t expect much upside in the shares of Hershey Co HSY following the withdrawal of Mondelez International Inc MDLZ's bid and weakness in the U.S. chocolate category as consumers are becoming more health conscious and avoiding added sugar.

   “While there may be some support at these levels based on investors' hopes of another bid for the company, the weakness in the U.S. chocolate category and struggling presence in China present little reason to expect upside,” Howard wrote in a note.

   In addition, macroeconomic pressures in China and Mondelez’s entry in to the country are weighing on sales from China.

   In this environment, Hershey’s top-line goals seem increasingly tough to achieve.

   “To achieve the current organic sales growth guidance of ~1.5 percent in 2016, Hershey needs ~3 percent growth in the second half, which seems fairly unlikely given the US category weakness,” Howard highlighted.

   On the positive side, the analyst said benign cocoa prices and the recent cost savings should help operating margins and enable Hershey to deliver constant currency EPS of $4.26 and $4.57 for 2016 & 2017, respectively.

   The analyst, who has a Market Perform rating on the stock, cut the price target by $2 to $98. At the time of writing, shares were up 0.29 percent to $95.57.

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3. Candy Crushed: What's Next in the Merger Saga of Confectionery Giants

   Oct 25, 2016 | The Street

   By Bob O'Brien

   The approach of Halloween represents an opportune time to check in on the confectionary business. Just as you can be assured that somebody ringing your doorbell the last day of this month is going to be outfitted as Donald Trump, the final two months of the year are going to see the resuscitation of talk of mergers in the branded products sector, including among candy makers.

   In fact, just last month rumor mongers and tweeters revived the talk that Mondelez(MDLZ) was once again sniffing around Hershey (HSY) , chatter that analysts at JPMorgan moved to quickly shut down, with an analyst insisting the suggestions had no basis. That the recitation of the popular Mondelez/Hershey hookup came just two weeks after Mondelez officially called off its $25 billion bid for the chocolate maker didn't seem to do much to dissuade the whisper down the lane set in the branded products space.

   The market doesn't seem to have put much stock into the suggestions that a Mondelez/Hershey hookup is inevitable. Hershey shares, buoyed much of the summer by anticipation of a takeover, dropped 15% after Mondelez officially retracted its bid. Hershey share price hasn't notably budged since its late summer downdraft. Meanwhile, price to earnings multiples for both companies -- confoundingly high throughout the summer on anticipation of deal making -- have edged off their best levels of the year.

   Still, both companies continue to command remarkably high P/E readings -- 21 times for Mondelez, 22 for Hershey -- for enterprises in the typically slow growth branded products business. Candy sales actually softened in early October.

   Still, Halloween is approaching, and Americans are expected to spend $2.5 billion on sweets to pass out to trick or treaters, according to the National Retail Federation.

   Nevertheless, the seasonal uptick in spending on Kit Kats and Reese's would seem to be well anticipated by investors, and appears to be baked into the share price of Hershey.

   All of which isn't to say that there isn't going to be further consolidation in the branded products space. Corporate deal makers have a lucrative currency in the conflated prices of their shares. And, despite P/E's that would look more appropriate on developers of cloud based software products, branded products' growth will be lucky to keep pace with the anemic GDP levels, leaving acquisitions as the only way for management to convince shareholders they're intent on top line expansion.

   "You can argue that acquisitions are the only path to growth," Gaurav Gupta, principal at leadership consulting firm Kotter International, who has worked extensively with food and beverage companies -- as well as in other industries -- said in a recent interview.

   But in the Hershey versus Mondelez breakdown, there's a binary realization: the former is more likely to be a suitor, the latter -- perhaps -- a target.

   Mondelez has been chatted up periodically as the takeover target for a global stalwart such as Nestlé. Handicappers said that Mondelez's push for Hershey was posited on the argument that, for Mondelez, getting bigger was the best way to insulate itself from being a takeover target. There was even some criticism on Wall Street of the seeming clumsiness of the Mondelez approach to Hershey, as if the takeover plan had been rather hastily constructed.

   After all, Hershey is something of the fortress of solitude of confection companies. The Hershey Trust, the financial contraption that founder Milton Hershey himself constructed, owns 20% of the outstanding shares. But it's got 81% of the voting power. Any entity making an advance on Hershey the corporation would have to win over Hershey the trust.

   The Hershey Trust, with a $12 billion endowment that is mostly tied to its stake in Hershey itself, is tasked with operating the educational facility that Milton Hershey prized. But the trust has been plagued with criticisms of its board members: intimations of profligacy, self dealing and term limits -- issues that attracted the attention of the attorney general of Pennsylvania, which has some dominion over the Trust. There are suggestions that the state could blunt any takeover of Hershey.

   Hershey could be a buyer, in transactions modeled on its purchase earlier this year of jerky maker Krave -- i.e., smaller, tuck-in assets. Any big push, such as moving into premium confections, where it doesn't have much of a footprint, would move the company away from its core competency.

   The dilemma for Mondelez, though, is that those kind of tuck-in acquisitions don't do enough to move the needle on sales, or do anything to make the company too big to swallow, especially while its focused on a margin improvement initiative. "This cost cutting effort is a significant part of its supply chain strategy, and might make it difficult to take on a sizable acquisition," Gupta said.

   Which might mean a stalemate for two of the leading parties in this summer's branded products M&A drama. Hershey, Gupta said, might spend the next several quarters both doing what it can to realign the trust that is its effective guardian, as well reenergizing customers and, importantly, employees, who have been effectively divorced from the culture that Milton Hershey tried to instill in some relative backwater west of Philadelphia.

   For Mondelez ....? There's been some scuttlebutt in the market that Kraft Heinz(KHC) could be interested in pursuing a purchase of the company, effectively reconstituting the former Kraft business with the additional assets that Heinz brings. But any transaction of that magnitude might have to hold off until the Kraft Heinz management feels that it has properly aligned itself after its own marriage, meaning that Mondelez might have some time to see if it can rationalize its business through margin improvement alone.

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