On Tuesday, Redburn-Atlantic initiated coverage on Hershey (NYSE:HSY) stock with a Sell rating, setting a price target of $165.00. The firm's analysis pointed to several headwinds for the confectionery giant, particularly within its core North American market.
Despite Hershey's strong foothold in chocolate sales, concerns such as stagnant chocolate consumption, increasing health consciousness among consumers, and heightened competition are expected to impact the company's growth.
The analyst from Redburn-Atlantic suggested that Hershey's organic sales growth is likely to be modest, projecting an increase of only 1.4% per annum over the long term. This growth rate is approximately 60 basis points per annum below the consensus estimate. The firm's outlook is particularly cautious regarding Hershey's North American salty snacks division, which represents 10% of the company's sales.
While acknowledging that the expansion of the salty snacks portfolio could boost near-term sales, Redburn-Atlantic is skeptical about the segment's long-term prospects. The firm's category-level analysis indicates that the market dynamics are not favorable for Hershey, especially after the initial distribution gains are realized.
As a result, the firm estimates a long-term sales growth of 2.8% per annum for Hershey's salty snacks, which is 160 basis points per annum below the market consensus.
The report from Redburn-Atlantic emphasizes the challenges Hershey faces in both its chocolate and salty snacks segments. The analyst's comments reflect a cautious stance on the company's ability to maintain its growth trajectory in the face of these industry challenges. The Sell rating and price target of $165.00 suggest that the firm believes Hershey's stock may not offer significant upside potential at this time.
In other recent news, Hershey's financial performance and strategic decisions have been under scrutiny by various financial firms. Amidst significant fluctuations in cocoa prices, Bernstein SocGen Group maintained a Market Perform rating for Hershey, while Citi adjusted Hershey's price target to $181 and maintained a Sell rating.
The firm anticipates that Hershey's upcoming third-quarter earnings report may not meet consensus estimates for organic sales growth and earnings per share (EPS), potentially due to weaker than anticipated performance in Hershey's North America Confectionary segment.
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. Additionally, Hershey has shifted its product offerings, introducing alternative sweets such as gummies, licorice, and flavored crèmes, in response to shifting consumer preferences and industry pressures.
UBS, Jefferies, and Barclays have also downgraded Hershey's stock, citing concerns over underwhelming chocolate volumes and overly optimistic earnings projections amidst cost pressures and uncertain demand.
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
Adding to Redburn-Atlantic's cautious outlook on Hershey (NYSE:HSY), recent data from InvestingPro provides additional context for investors. The company's P/E ratio stands at 20.4, which aligns with an InvestingPro Tip indicating that Hershey is "Trading at a high P/E ratio relative to near-term earnings growth." This suggests that the stock may be overvalued compared to its expected growth, supporting the analyst's skepticism.
Despite these challenges, Hershey maintains some positive attributes. An InvestingPro Tip notes that the company "Has raised its dividend for 14 consecutive years," demonstrating a commitment to shareholder returns. This is further supported by a current dividend yield of 2.97% and a remarkable dividend growth of 32.24% over the last twelve months.
However, reflecting the concerns raised in the article about stagnant growth, InvestingPro data shows that Hershey's revenue growth in the last twelve months was just 1.44%, with a more concerning quarterly revenue decline of 16.7% in Q2 2024. This data corroborates the analyst's projection of modest organic sales growth.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips on Hershey, providing a deeper understanding of the company's financial health and market position.
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