The Hershey Company (NYSE:HSY), a titan in the confectionery industry with a market capitalization of $36.45 billion, finds itself navigating a complex landscape of challenges and opportunities as it approaches the end of 2024. According to InvestingPro data, the company maintains a GOOD financial health score despite recent headwinds, demonstrating its resilience in a challenging market environment. Known for its iconic chocolate brands, Hershey faces headwinds from rising cocoa costs, shifting consumer preferences, and competitive pressures in the broader snacking category. This comprehensive analysis delves into the company's current position, strategic initiatives, and future prospects, offering insights for investors considering the stock's potential in the coming years.
Market Performance and Challenges
Hershey's recent market performance has been marked by a series of challenges that have impacted its stock price and outlook, with the stock currently trading near $179.48, down about 4% over the past year. InvestingPro analysis reveals that 10 analysts have recently revised their earnings downward for the upcoming period, reflecting growing concerns about near-term performance. Want deeper insights? InvestingPro offers exclusive access to over 30 additional key metrics and analysis tools for HSY. The company has experienced weakness in the confectionery category's consumption and ongoing share losses, raising concerns among analysts about its ability to maintain growth in a competitive snacking landscape.
One of the primary issues facing Hershey is the persistent rise in cocoa costs, which account for approximately 20% of the company's cost of goods sold (COGS). The cocoa market has seen a 40-year low in stocks-to-grind ratios, indicating a bullish trend for cocoa prices. This situation is exacerbated by factors such as loss of cocoa trees due to disease and competition from mining activities in cocoa-producing regions.
The elevated cocoa costs are expected to remain a significant challenge for Hershey in the near term, with analysts projecting that these pressures will continue to impact profitability, particularly in the first half of 2025. The company's ability to manage these input cost increases without alienating consumers or harming long-term category stability will be crucial to its financial performance.
Pricing Strategy and Volume Trends
In response to rising costs, Hershey has implemented a strategy of incremental pricing. However, this approach is not without risks. Analysts are questioning whether these pricing actions will lead to greater than historical elasticity, especially considering that price points in most adjacent snacking categories are trending lower.
The company's volume trends have been disappointing, with distribution declines noted across several sub-categories in measured retail channels. This weakness in volume has led analysts to revise their growth expectations downward for the fourth quarter of 2024 and the first two quarters of 2025. Some analysts suggest that previous expectations for improvement may have been too aggressive.
Hershey's channel mix is also a point of concern, with significant exposure to underperforming drug retail and convenience stores. This unfavorable mix could further impact the company's ability to drive volume growth and maintain market share.
Future Outlook and Projections
Despite the current challenges, some analysts see potential for improved earnings in 2026, once the impact of higher cocoa costs in 2025 has been absorbed and costs potentially normalize. The company's strong fundamentals, including a return on equity of 43% and operating with moderate debt levels according to InvestingPro, suggest potential for recovery. Notably, Hershey has maintained dividend payments for 54 consecutive years, demonstrating remarkable financial stability. For comprehensive valuation analysis and to determine if HSY is currently undervalued, check out our undervalued stocks list. However, this outlook is contingent on several factors, including improved underlying core chocolate market share trends and the company's ability to successfully navigate the pricing environment.
Analysts have adjusted their earnings per share (EPS) estimates for Hershey, reflecting the anticipated headwinds. For example, one firm lowered its EPS estimates from $9.35 to $9.29 for 2024 and from $8.88 to $8.65 for 2025. These revisions underscore the uncertainty surrounding Hershey's near-term performance.
The company's predominantly U.S.-focused business model could lead to margin rebasing and potentially stagnant earnings from 2023 to 2026, according to some analyst projections. This outlook has prompted a reevaluation of Hershey's valuation multiples, with one firm reducing its applied multiple to approximately 19 times the estimated 2025 EPS, down from a prior estimate of about 20 times.
Bear Case
How might rising cocoa costs impact Hershey's profitability?
The persistent increase in cocoa prices poses a significant threat to Hershey's profit margins. With cocoa accounting for a substantial portion of the company's COGS, any sustained rise in prices could lead to margin compression. Hershey faces a delicate balance between passing these costs on to consumers through price increases and potentially losing market share to competitors or alternative snack options. If the company absorbs these costs to maintain competitive pricing, it could result in reduced profitability and potentially impact shareholder returns. The situation is further complicated by the expectation that cocoa costs will remain elevated due to supply constraints and agricultural challenges, potentially creating a long-term headwind for Hershey's financial performance.
What risks does Hershey face from changing consumer preferences?
Hershey is confronting a shift in consumer preferences that could erode its market position. As health-conscious trends gain momentum, traditional chocolate confectionery may face reduced demand, particularly among younger demographics. The company's heavy reliance on its core chocolate brands leaves it vulnerable to these changing tastes. Additionally, the widening price gap between chocolate and other snack categories may redefine the value proposition for U.S. consumers, potentially accelerating volume declines in everyday chocolate purchases. Hershey's limited diversification outside of chocolate and underinvestment in brands beyond Reese's and Hershey's could hinder its ability to adapt to evolving consumer preferences, potentially leading to sustained market share losses and challenges in maintaining growth.
Bull Case
How could Hershey's pricing strategy offset rising input costs?
Hershey's strategic approach to pricing could potentially mitigate the impact of rising cocoa costs and support profitability. The company has demonstrated a willingness to implement incremental price increases, which, if executed carefully, could help maintain margins without significantly impacting demand. Hershey's strong brand recognition and loyal customer base may provide some pricing power, allowing it to pass on a portion of the increased costs to consumers. Additionally, the company's proactive measures, such as purchasing options to hedge against cocoa price fluctuations, could provide a buffer against sudden cost spikes. If Hershey can successfully balance price increases with volume retention, it may be able to navigate the challenging cost environment while preserving its financial health.
What opportunities exist for Hershey to improve market share?
Despite current challenges, Hershey has several avenues to potentially improve its market share. The company could leverage its strong brand equity to expand into adjacent snacking categories, diversifying its product portfolio and reducing reliance on traditional chocolate confectionery. By focusing on innovation and developing new products that align with evolving consumer preferences, Hershey could capture new market segments. The company's established distribution networks and marketing expertise provide a solid foundation for introducing and scaling new offerings. Additionally, Hershey could capitalize on seasonal opportunities, where consumers tend to increase purchase frequency, to drive sales and reinforce brand loyalty. By strategically investing in emerging trends, such as premium or better-for-you snack options, Hershey could position itself for growth and potentially recapture market share from competitors.
SWOT Analysis
Strengths:
- Strong brand recognition and customer loyalty
- Established market leadership in chocolate confectionery
- Robust distribution network and marketing capabilities
- Proven ability to implement strategic pricing initiatives
Weaknesses:
- High dependence on cocoa as a key input, exposing the company to commodity price volatility
- Limited product diversification beyond core chocolate brands
- Underinvestment in brands outside of Reese's and Hershey's
- Unfavorable channel mix with exposure to underperforming retail segments
Opportunities:
- Potential for growth and margin improvement in 2026 as cocoa costs potentially normalize
- Expansion into adjacent snacking categories to diversify product portfolio
- Innovation in healthier snack options to align with changing consumer preferences
- Leveraging seasonal sales peaks to drive growth and market share
Threats:
- Persistent rise in cocoa costs impacting profitability
- Increasing competition from alternative snack categories
- Shifting consumer preferences towards healthier food options
- Potential for greater price elasticity as consumers become more price-sensitive
Analysts Targets
- Piper Sandler: $168.00 (December 3rd, 2024)
- Barclays (LON:BARC): $180.00 (November 11th, 2024)
- Barclays: $202.00 (November 7th, 2024)
- RBC Capital Markets: $205.00 (November 5th, 2024)
- Piper Sandler: $165.00 (October 23rd, 2024)
- Jefferies: $163.00 (September 26th, 2024)
- Barclays: $202.00 (September 25th, 2024)
- Citi Research: $182.00 (August 27th, 2024)
- Barclays: $204.00 (August 5th, 2024)
As Hershey navigates through these challenging times, investors will be closely watching how the company manages its pricing strategy, addresses volume declines, and positions itself for potential growth in 2026. With current revenue of nearly $11 billion and a P/E ratio of 20.68, the company maintains significant market presence despite headwinds. For exclusive access to comprehensive analysis, real-time alerts, and expert insights on HSY, explore our detailed Pro Research Report, available on InvestingPro, covering what really matters for smarter investment decisions. The company's ability to innovate, diversify its product portfolio, and effectively manage costs will be critical in determining its long-term success in the competitive confectionery and snacking markets.
This analysis is based on information available up to December 3, 2024.
InvestingPro: Smarter Decisions, Better Returns
Gain an edge in your investment decisions with InvestingPro’s in-depth analysis and exclusive insights on HSY. Our Pro platform offers fair value estimates, performance predictions, and risk assessments, along with additional tips and expert analysis. Explore HSY’s full potential at InvestingPro.
Should you invest in HSY right now? Consider this first:
Investing.com’s ProPicks, an AI-driven service trusted by over 130,000 paying members globally, provides easy-to-follow model portfolios designed for wealth accumulation. Curious if HSY is one of these AI-selected gems? Check out our ProPicks platform to find out and take your investment strategy to the next level.
To evaluate HSY further, use InvestingPro’s Fair Value tool for a comprehensive valuation based on various factors. You can also see if HSY appears on our undervalued or overvalued stock lists.
These tools provide a clearer picture of investment opportunities, enabling more informed decisions about where to allocate your funds.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.