Hershey Foods (NYSE:HSY) has been a standout performer over the last two decades, outpacing the broader market with a remarkable 657% increase when adjusted for dividends. Despite this impressive track record, the stock is currently trading 30% below its record levels, presenting investors with a potential buying opportunity given its market capitalization of $39 billion.
Performance in Q4 2023
Hershey, renowned for its confectionery products globally, reported sales of $2.66 billion in Q4 2023, marking a modest 0.2% increase year over year. Although sales fell short of Wall Street estimates, Hershey exceeded earnings expectations, posting earnings of $2.02 per share compared to estimates of $1.95 per share. The company attributed its core revenue decline to lower volume and an unfavorable product mix, exacerbated by a 6.5% increase in product prices. Additionally, its North American salty snacks business experienced a notable 26% volume decline, largely due to a planned inventory reduction linked to the implementation of enterprise resource planning software.
Despite these challenges, Hershey’s stock rallied over 4% following the earnings announcement, driven by optimism surrounding the company’s cost optimization efforts and a significant dividend hike of 15%.
Impact of Soaring Cocoa Prices
Looking ahead to 2024, Hershey anticipates revenue growth in the range of 2% to 3%, with flat earnings expected. However, analysts had projected higher sales growth of 3.4% and profit growth of 12% for the year. The surge in cocoa prices, attributed to adverse weather conditions in West Africa, a key cocoa producer, poses a significant headwind for Hershey. Cocoa futures have doubled over the past year, prompting investment bank Morgan Stanley to downgrade HSY stock to “underweight” and reduce its price target to $183 from $191. Rising input costs, particularly cocoa prices, are expected to exert downward pressure on Hershey’s bottom line over the next couple of years, along with increased competition and weaker demand in the salty snacks segment.
Target Price and Analyst Outlook
Despite near-term challenges, analysts maintain a generally positive outlook on Hershey’s stock. Out of the 22 analysts covering HSY, seven recommend a “strong buy,” 14 recommend a “hold,” and one recommends a “strong sell,” resulting in a consensus rating of “moderate-buy.” The average target price for the stock stands at $218, suggesting a potential upside of 12.7%.
In summary, while Hershey faces headwinds from rising cocoa prices and other industry challenges, its solid track record, dividend growth, and potential upside make it an intriguing option for investors considering the current dip in its stock price.
Featured Image: Unsplash
Author Faith Yakubu 
