Key points
- Hershey’s shares are falling as the company struggles with high cocoa prices and a decline in popcorn sales.
- The company is expected to implement pricing and merchandising strategies to increase margins, with the biggest gains in the second half of the year.
- The core business is solid, and long-term investors can use this pullback as an opportunity to buy on the dip.
- 5 stocks we like better than Hershey
Shares of The Hershey Company NYSE:HSY are down about 7% following the company’s mixed earnings report on Feb. 8. The pastry chef missed profits slightly, with revenue of $2.66 billion missing analysts’ estimates of $2.72 billion. However, the company beat earnings, posting a surprise earnings per share (EPS) of $2.02. Analysts had expected EPS of $1.95.
What may concern investors most in the short term is slowing growth. Both revenues and earnings remained stable on a year-over-year basis (YOY). That’s why it’s important for investors to understand the issues at play with HSY stock.
Hershey’s faces higher production costs
Even though it is a large-cap stock, Hershey’s is particularly sensitive to rising commodity prices. The price of cocoa has increased by 142% in the last 52 weeks. And in the company’s Q&A session with analysts after the earnings release, management indicated that they do not expect relief from the surge in cocoa prices in 2024.
As you would expect, rising cocoa prices are eating into Hershey’s earnings. However, Hershey’s Chief Executive Officer (CEO) Michele Buck said during the company’s conference call that the company will not hesitate to make strategic price increases to help partially offset rising cocoa prices.
Buck said: “…As you know, we cannot talk about future pricing, but I want to be very clear that there is no change in our pricing strategy and our commitment to using pricing to cover inflation and support investments that we believe are critical to drive the business.”
I’m trying to bring flavor back to savory snacks
Although the company is best known for its unique chocolate products, Hershey’s derives significant revenue from its savory snacks business. And one of the most notable brands for the company is Skinny Pop popcorn.
The company’s savory snack sales fell short of expectations for the quarter, and Skinny Pop sales were a significant reason for that decline. According to Buck, the sales decline was consistent with expectations and began to improve in December.
This is a significant category for the company in 2024 because it is the category that will need to offset the decline in earnings due to the price of cocoa. However, the company expects sales in this category to be in line with those of 2023.
Long-term investors just had an opportunity
With blue-chip companies like Hershey, buy-and-hold investors have to pick their spots. In this case, HSY stock is trading about 7% below its pre-earnings price of about $208. Additionally, the stock is trading near its 52-week low.
Every investor has different considerations, but these are generally the conditions under which investors who are long in a stock get a buying opportunity. Hershey’s analyst ratings on MarketBeat give the stock a consensus price target of $227.86. That’s a 19% upside for a stock trading at a price-to-earnings (P/E) ratio of 21x, lower than its historical average of 26x and in line with the industry average for consumer staples stocks.
That said, HSY stock has been trading in a tight range since October 2023, a time when the rest of the market was on fire. In fact, the stock is up just 2% over the past three months. And it looks like the best growth opportunities for the company will come in the second half of the year.
However, there is nothing fundamentally wrong with the company’s business. Therefore, these are the pullbacks you look for as a long-term investor. And you get a dividend yielding 2.47% and rising for 14 consecutive years.
Before you consider Hershey, you’ll want to hear this.
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