On Tuesday, CFRA downgraded shares of Hershey (NYSE:HSY) from Hold to Sell, significantly reducing the 12-month price target from $214.00 to $169.00. The revision reflects a new valuation of 19 times the firm's estimated earnings per share (EPS) for 2025, which has been lowered from $10.17 to $8.92. For 2024, the EPS forecast was also cut from $9.38 to $8.93. The new target contrasts with Hershey's long-term average price-to-earnings (P/E) ratio of 23 times.
The downgrade was driven by concerns over potential declines in demand and increased cost pressures. Hershey is facing substantial cocoa cost inflation, as well as a weakening demand environment that could adversely affect the company's financial performance. The firm pointed out that Hershey's sales are predominantly in the U.S. market, with only 13% of its sales being international, positioning it differently from its global snacking peers.
Hershey's reliance on the convenience store sales channel was cited as a specific challenge, given the current trend of soft store traffic. As consumers become more cautious with their spending, the impact on sales could become more pronounced. The firm also highlighted the risk of margin pressure due to potential weaker-than-expected demand, which could lead to lower capacity utilization. This is particularly relevant for Hershey, given its recent investments in capacity for seasonal products.
The report also mentioned the significance of Halloween for Hershey's sales, noting that the holiday accounts for approximately 10% of the company's annual sales. The split between candy consumption for trick-or-treating and self-consumption is about even. Looking ahead, CFRA anticipates increased earnings volatility for Hershey as the company navigates various phases of its enterprise resource planning (ERP) implementation.
In other recent news, Hershey has been facing a series of challenges. Redburn-Atlantic initiated coverage on Hershey with a Sell rating, citing concerns about the company's growth in the North American market due to stagnant chocolate consumption, increasing health consciousness among consumers, and heightened competition. The firm also expressed skepticism about the long-term prospects of Hershey's North American salty snacks division.
Bernstein SocGen Group maintained a Market Perform rating for Hershey amidst significant fluctuations in cocoa prices, while Citi adjusted Hershey's price target to $181 and maintained a Sell rating, anticipating that Hershey's upcoming third-quarter earnings report may not meet consensus estimates for organic sales growth and earnings per share (EPS).
Hershey has responded to these market challenges by announcing a 12% price increase on about half of its product portfolio, a move that RBC predicts will positively impact the company. Hershey has also shifted its product offerings, introducing alternative sweets such as gummies, licorice, and flavored crèmes, in response to shifting consumer preferences and industry pressures.
In management news, Hershey has appointed Michael Del Pozzo as the new President of its U.S. Confection segment, a move expected to drive Hershey's growth initiatives within the United States. These recent developments reflect Hershey's attempts to navigate the shifting market dynamics.
InvestingPro Insights
Recent data from InvestingPro adds depth to CFRA's analysis of Hershey's current position. The company's P/E ratio stands at 20.28, with an adjusted P/E of 18.27 for the last twelve months as of Q2 2024. This aligns closely with CFRA's new valuation of 19 times estimated 2025 EPS, suggesting that the market is already pricing in some of the concerns raised in the downgrade.
InvestingPro Tips highlight that Hershey is trading near its 52-week low, which could be a reflection of the challenges outlined in CFRA's report. Additionally, 11 analysts have revised their earnings downwards for the upcoming period, corroborating CFRA's reduced EPS forecasts for 2024 and 2025.
Despite these challenges, Hershey maintains some positive attributes. The company has raised its dividend for 14 consecutive years and has maintained dividend payments for 54 consecutive years. This consistent dividend history, coupled with a current dividend yield of 2.97%, may provide some stability for investors during this period of potential earnings volatility.
For readers interested in a more comprehensive analysis, InvestingPro offers 12 additional tips on Hershey's financial health and market position.
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