UPDATE 2-RESEARCH ALERT-Bernstein downgrades Hershey

(Adds analyst comments and share price movement)

April 11 (Reuters) - Sanford C. Bernstein downgraded Hershey Co (HSY.N), the maker of Hershey Kisses and Reese's peanut butter cups, to "underperform" from "market-perform," and said that despite rising commodity costs, the firm has been unable to realize any price hikes over the six-month period ending Feb. 23.

The top U.S. chocolate maker has also seen a drop in volume growth and has been losing its market share to rival Mars Inc during this period, the brokerage said.

"The company's inability to realize price increases is particularly worrisome, given that list prices have been raised twice in the last year. This suggests that even intense promotional activity is failing to resuscitate the company's top line," Bernstein said in its research note.

It cut its price target on the stock to $32 from $36.

The brokerage expects rising cocoa, sugar and diesel price inflation to put further pressure on the company's margins in 2008, even as dairy cost inflation is expected to ease in the second half of the year.

"We believe that investors are overly bullish about Hershey's prospects," Bernstein said, while noting that the company's stock trades at 20.8 times consensus earnings estimates of $1.85 for 2008.

Shares of the company fell nearly 5 percent to $36.60 in morning trade on the New York Stock Exchange.

BATTLING COMPETITION

The chocolate maker continues to lag the market in the fast-growing dark and premium chocolate segments, Bernstein said.

The firm's new premium chocolate candy, Bliss, as well as the new line of premium chocolates it developed with Starbucks Corp (SBUX.O), are both unlikely "to move the needle on Hershey's sales growth," as the Bliss line appears similar to some of Mars' existing offerings, the brokerage said.

Hershey has been losing market share to rivals like Mars as the firm has had little success with new dark chocolate and premium products, two of the faster-growing areas of the candy business.

"With continued competitive pressures from Mars, we believe that significant investment will be required to reignite top-line growth at home and abroad," Bernstein said.

As a result, Hershey is unlikely to be able to sustain its superior earnings before interest and tax growth relative to its U.S. peers and should therefore not trade at a premium to the group, the brokerage added.

(Reporting by Tenzin Pema in Bangalore; Editing by Anil D'Silva, Jarshad Kakkrakandy)