Hershey: A Deep Dive Into A Confectionery Giant Facing Headwinds

seekingalpha11-21 13:22

Hershey's strong brand equity and pricing power make it a compelling value investment, especially for dividend-focused investors seeking stability in bear markets.Despite attractive valuation metrics,...

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You can become one too!","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4585":"ETF&股票定投概念","BK4588":"碎股","BK4533":"AQR资本管理(全球第二大对冲基金)","BK4504":"桥水持仓","BK4212":"包装食品与肉类","BK4532":"文艺复兴科技持仓","HSY":"好时"},"translate_title":"好时：深入探讨面临逆风的糖果巨头","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"HSY":0.9},"content_text":"Hershey's strong brand equity and pricing power make it a compelling value investment, especially for dividend-focused investors seeking stability in bear markets.Despite attractive valuation metrics, Hershey faces challenges like stagnant earnings growth, shifting consumer preferences, and soaring cocoa prices.To mitigate risks, consider a diversified approach, including potential hedging with GLP-1 drugmakers like Novo Nordisk and Eli Lilly.Assigning Hershey a BUY rating for long-term, high-risk-tolerant investors focused on stable dividends and potential outperformance in bear markets.Editor's note: Seeking Alpha is proud to welcome Michael Duke as a new contributing analyst. You can become one too! Share your best investment idea by submitting your article for review to our editors. Get published, earn money, and unlock exclusive SA Premium access. Click here to find out more »    mphillips007  Introduction Today, I'll be analyzing The Hershey Company stock (NYSE:HSY). Current broad market valuations of the S&P 500 are quite high, though not necessarily unjustified. If you're a value investor seeking a contrarian and undervalued investment, especially one focused on dividends, Hershey has likely caught your attention. I hold a substantial position in HSY, acquired over the past few months, believing it offers considerable value. Today, I'll explore why it might—or might not—be a suitable addition to your portfolio. Company Overview Let's begin with an overview of the company. Hershey is the leading confectionery company in the United States, generating $11.2 billion in sales in 2023. Hershey's dominant market position is built on brands like Hershey's Bars, Reese's Peanut Butter Cups, Almond Joys, Mounds, Cadbury (US rights), Heath, Hershey's Kisses, Icebreakers, Jolly Ranchers, KitKats, and its expanding salty snack portfolio (Pirate's Booty, Skinny Pop). This brand strength justifies Morningstar's wide economic moat rating for the company.  With a market cap of under $40 Billion, the size of the company for its market share demonstrates that:  The confectionary market is not that large relative to the packaged food products market at large. There is significant upside over time if the company were to continue to expand into new salty snack segments and other food products. The reputation of American chocolate tasting different from Europeans handicaps the international potential of the confectionary brands, but there is significant international expansion across new market segments the company might choose to enter via M&A. The market cap of diversified food and beverage player PepsiCo (PEP) hovering around $300B demonstrates the relative small size of Hershey.  Investment Thesis My investment thesis in this company centers on several key factors. First, it is a wide moat stock which owns some of the most recognizable brands in American candy today. Consumer scans have found that Hershey's brands are the favorite among young consumers, indicating significant long-term revenue and earnings safety. This company has the largest market share in the US confectionary market. Second, while candy is somewhat discretionary, its sales are also tied to Halloween and Easter, making confectionary cashflows less cyclical than the broader market. Also, chocolate is a dopamine-inducing product which elicits a physiological response. Third, headwinds facing the company currently have it trading at a historically low valuation with the highest starting dividend yield in 10 years, providing a solid entry point on a company which usually trades at a premium. And this company has demonstrated a tendency to outperform the broader market during bearish times, indicating a margin of safety at this stage in the bull cycle. Its low beta and average volatility make it a good diversification tool for portfolios heavy with cyclical stocks. Price Performance and Market Sentiment Let's start by taking a look at recent performance. This has been one of the worst performing stocks that I've been tracking over the last year. Interestingly, over the past five years, it has underperformed the broader market during bullish moves in the index but significantly outperformed during the 2022 bear market. This makes sense; companies selling packaged food products often thrive during inflationary periods if they possess pricing power, enabling them to offset commodity inflation and sustain sales growth. However, since the second quarter of last year, HSY has underperformed significantly, a trend continuing into this year. Two narratives negatively impact sentiment: the surge in popularity of GLP-1 weight-loss drugs and the significant increase in cocoa prices. While underperforming overall, the stock massively outperformed during the 2022 inflation shock. (Seeking Alpha) Valuation and Earnings Growth But has the sell-off created a value opportunity? I believe so, with some caveats. Historically, HSY's P/E ratio is currently at the lower end of its 25-year range—an anomaly in today's market. This contrasts sharply with market darlings like Costco, whose P/E multiple has continuously expanded over the past 15 years, driving the substantial majority of returns over that timeframe. While I'm not suggesting that recent multiple expansion in today's environment makes a stock a bad value, I do believe that there is value in allocating to investments that are zigging when the market is zagging. In a market when many stocks are trading at the highest PE ratios seen since the new millennium, a consistent company like HSY in an economic sector insulated from AI disruption that is trading at the low end of this valuation spectrum looks like value to me, despite the justified reasons for its bargain price. The stock is trading at the lower end of PE ratios seen since the new millennium. (Seeking Alpha) Out of the first 6 popular stocks that came to my head, HSY was the only one trading significantly below the average PE ratio of the past 10 years. Some stocks, like RSG and COST, have experienced significant multiple expansion in recent years. (Seeking Alpha) Furthermore, HSY's dividend yield is at a 10-year high. While this suggests value, the company did raise their dividend significantly over the past year, at growth rates well above historical averages. This was due to the company adopting a new dividend policy aimed at paying out over 50% of earnings and raising the dividend along with earnings growth. Acute observers who have been paying attention may note that this does not bode well for dividend growth in the short term. Although this stock has risen its dividend in the low double digits over the last few years, I expect a zero to low single digit raise in the upcoming dividend announcement. The dividend yield is the highest seen in the last 10 years, and 50% higher than average over that period. (Seeking Alpha) The biggest black eye for Hershey's valuation is its Price Earnings Growth ratio, which currently sits at a lofty metric of 3.81. While this stock is objectively \"cheap\" by many valuation metrics, this metric demonstrates the devil's advocate perspective to valuation. Furthermore, there are many stocks today in the market that look expensive in PE terms but cheap in PEG. For example, comparing its PEG ratio to Nvidia, a cyclical stock experiencing a boom in new segment sales, highlights this stagnation. With that in mind, I think it's fair to say that while the current price represents a historically low valuation on earnings and high yield, expecting significant outperformance in the near term would be unrealistic. However, I would not be surprised if this stock outperformed during a broad market drawdown. Furthermore, if earnings growth normalizes prior to the next market-wide bear market, then investors will likely be glad they picked this one up. Nvidia's PEG Ratio is much lower than HSY, bringing into question which stock is really \"cheaper\" at the moment (PortfoliosLab) Financial Performance and Risks A company of this stage and in this mature industry should be expected to grow topline at low single digits. However, recently management guided down from 2% sales growth to flat, which raises some questions. It suggests factors beyond the narrative and commodity prices are at play because the high cocoa prices over$8,000/ton haven't even been baked into their financials, as the company uses forward contracts to secure supply. I don't want to speculate too much here, but the revenue dip might indicate that Hershey has raised prices too aggressively, potentially losing market share to competitors. However, there is no data that I can find that really verifies that, besides the financial performance of this company. Snapshot from the company's most recent earnings report, showing stagnating sales and negative earnings per share trends. (The Hershey Company) The way I see it, the main risks are: prolonged high cocoa prices (although I anticipate a reversion to the mean), the uncertain long-term impact of GLP-1 drugs, and recent regulatory uncertainty stemming from potential changes related to food additives. These factors could keep the stock range-bound for a considerable period.    Investment Strategy and Hedging So, is HSY a buy, hold, or sell? It depends on your investment strategy. My yield-focused strategy makes HSY attractive due to its high and historically safe dividend yield, and its tendency to outperform in bear markets. I've already significantly invested to the point that this stock now composes over 6% of my entire portfolio, but might add more on further dips. However, I don't expect market-beating returns in the short term. Momentum traders should look elsewhere until earnings growth normalizes. I do think that it is worth considering a few other stocks which might provide risk parity in the short term. To hedge against GLP-1-driven sentiment, consider Novo Nordisk (NVO) and Eli Lilly (LLY). These showed inverse correlation with HSY at the time of the dramatic HSY selloff. The makers of Ozempic and Mounjaro are in a recent sell-off due to regulatory concerns, making their entry price more appealing. One counterpoint to the risk-parity thesis is that interestingly, both pharma companies and food makers are coming into bearish sentiment right now with the announcement of RFK Jr. as Trump's HHS Secretary pick. GLP-1 drug markers LLY and NVO have outperformed HSY dramatically during the \"Ozempic Era\", insinuating some risk parity between the two stocks and Hershey (Seeking Alpha) Technical Analysis and Future Outlook I'm not a huge technical analysis guy, but I do find it useful to inform when to enter into long-term positions. Also, I don't use crazy indicators, just draw simple lines to identify trends and levels of support. To me, the chart looks fairly bearish, having broken below key support levels at $180-ish a share: Technical analysis showing the bearish momentum of the price. The stock has broken below the low-180s support level it has been holding for the majority of the year. (TradingView) However, for long-term investors who share my views on this stock, this could be an opportune time to accumulate. However, I wouldn't be surprised if this stock goes even lower from here. Given the way that this chart looks, it could trade all the way down into the $150s before finding a new base. The recent earnings guidance, revised downwards, shows that the company expects tough times ahead. A dividend increase is unlikely in the near future, so it is worth contemplating what a low single digit raise (or no raise) in the upcoming dividend announcement will do to the price. How can I give this stock a BUY rating when I believe that it could go down in price in the near term? Simply put, I believe it will be worth more in the future, and I also believe that it is wise to pick up beaten down stocks with higher yields at the tail end of a broad market bull run. Conclusion  In summary, HSY is a mixed bag. There's value, but other stocks offer faster growth and positive momentum. If your time horizon is short, wait for a better entry point. For long-term investors seeking a relatively safe dividend and a history of bear market resilience, HSY could be worth considering.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485131433"}