Friday, May 30, 2008

Hershey (NYSE:HSY): Short?

Deutsche Bank is out with a negative call on Hershey (NYSE:HSY) reiterating their HOLD opinion based on challenging fundamentals incl. competition and input cost volatility, a premium valuation, and difficulty of the changing US choc. market. Although long term they believe the Trust will change its strategic approach, they don't think action will occur short term.

Firm highlights several scenarios noting most point to downside risk:

- Hershey-Cadbury deal would value the stock around $36 per share.

- Cadbury-Hershey deal would vlue HSY around $47-$48 but there is minimal pressure on Cadbury to pay a premium for Hershey and, given activist shareholders and questions about Cadbury's execution missteps, any dilution to Cadbury would be viewed with significant skepticism.

- Nestle-Hershey. Recent unconfirmed press reports, as for example, in the Dow Jones wire service, on a Nestle-Hershey JV has led to investors bidding up the shares of Hershey. While an agreement between the two would certainly be advantageous to Hershey as it gives the company global distribution, the firm doesn't see much upside for Nestle.

- Kraft-Hershey. This scenario to DB is the most unlikely.

Hershey's leadership team will host an analyst meeting in NYC on 6/17/08. With numerous intermediate term challenges, the firm expects CEO West to focus on LT turnaround efforts incl. greater brand support and higher quality. As a result, they expect mgmt to lower LT EPS growth expectations to 6-8% vs. previous 9-11%.

Notablecalls: I think this is the call that should put the recent takeover chatter to rest. Would strongly consider shorting the stock here for a reactionary move down (would not overstay my welcome, though)

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