Hershey Stock is a Buy The Dip stock

Value stocks are backed by impeccable businesses that are expected to generate high-margin profits. The quality of the company is only the beginning of the equation because investors must also justify the purchase at a good enough price.

Overpaying for a good thing still means overpaying, then The Hershey Co. NYSE:HSY it can be the perfect place to look for a value play. After falling as much as 35% from its all-time high price of $276 per share, Hershey’s stock is now consolidating around a price that investors may want to pay attention to.

Some Wall Street institutions noticed this discount, which turned out to be quite attractive to buy. A very specific – and cyclical – reason for this decline may soon be eliminated, paving the way for broader markets to turn bullish on the stock and restore it to its former glory.

It’s just a bump in the road

Cocoa prices have hit an all-time high this year, more than doubling in the last quarter alone. Considering that Hershey is in the chocolate business as its main source of revenue, higher production costs may have scared off some investors in the market.

However, this is where the quality factor comes into play in this value game. Hershey’s financials show the company consistently maintains gross margins between 43% and 45%, which only dropped to 42% during the quarter in which Cocoa rose to all-time highs.

Bears expect these costs to hit the company’s pricing power and brand penetration and are ready to deal. Cocoa prices cannot remain this high for much longer, as raw materials are cyclical; this bump in the road may no longer exist and bring the stock back to a better feeling.

Bulletproof profits

Hershey can be considered part of the consumer staples stocks, characterized by their immunity to the economic cycle. Other titles in Consumer Staples Select Sector SPDR Fund NYSEARCA: XLP may include Ulta Beauty Inc. NASDAQ:ULTA since consumers will likely continue to purchase makeup and skin care products whether the economy is booming or busting.

The same could be said of Hershey as it also operates in other snacks such as SkinnyPop. Even if chocolate goes out of fashion (unlikely), Hershey is set to keep profits humming. Some parameters can determine the reliability of these profits.

Return on invested capital (ROIC) can be an indicator of financial strength and management’s ability to reinvest shareholder money responsibly. Over the past five years, Hershey has averaged an ROIC of 17% because, over the long term, stock prices tend to increase at the same rate as ROIC.

Additionally, the company’s $39 billion size allows it to carry a reasonable amount of low-cost debt. Hershey’s debt, which makes up 55% of the company’s total capitalization, also allows the stock to remain detached from the interest rate cycle.

Part of the low-beta group of stocks, Hershey’s 0.34 beta makes it the type of stock sought after by pension funds and other asset managers. In fact, Vanguard Group increased its exposure to the stock by 1.8% last quarter, representing a transaction of approximately $51 million.

The technical data provides more information

Hershey shares are now down more than 50% from their all-time high price, making them an attractive proposition for investors seeking high returns at discounted prices.

Despite the contracted share price, markets are still willing to value this company as its value moat. Compared to other colleagues in the industry, like US Foods Holding Corp. NYSE:USFDHershey exhibits some peripheral characteristics that make it a more attractive choice.

Based on its forward price-to-earnings (forward P/E) ratio, Hershey trades at a multiple of 19.1x, a 29% premium to US Foods’ 14.8x valuation. The market must have a good reason to overpay for Hershey shares in a competition for two consumer staples stocks.

There is also a third, Campbell’s Soup New York Stock Exchange: CPB, under Hershey. In his forward P/E valuation of 13.4x, Campbell gives Hershey a premium valuation of 42%.

Knowing that cocoa prices are set to reverse in the next cycle, markets may be preparing for an earnings recovery in May 2024. More than a potential earnings recovery, markets may be looking for more guidance from management now that margins may increase on normalized cocoa. prices.

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