When it comes to navigating the ups and downs of the stock market, experience teaches you to expect a few rough patches along the way. This has certainly been the case for The Hershey Company (HSY), a staple in the food and beverage industry since the 1890s. Known for its iconic sweets, Hershey is as recognizable a brand as they come.
Surprisingly, Hershey’s stock has plummeted over 40% from its peak, a stark contrast to the soaring broader market. The last time the company faced such a drastic dip was during the 2008 global recession. Today, the challenges are more internal. Hershey is grappling with significant pressure on its margins and concerns that popular weight loss medications like GLP-1 agonists are steering consumers away from indulging in sweets.
On the surface, things may appear grim, but a closer look reveals potential opportunity. Here’s why investors should consider adding Hershey to their portfolios for the long haul.
Hershey’s Stock Woes Don’t Reflect Its Core Business
At present, Hershey is in the midst of a challenging period. The company recently wrapped up its fiscal 2024 reporting and set forth an underwhelming forecast for 2025, predicting earnings per share between $6 and $6.18, a decline from $9.37 in 2024. They attribute this forecasted dip to rising commodity costs, adjusted incentive compensation, and increased tax rates.
It’s worth noting that Hershey’s struggle isn’t due to a lack of appetite for its products. They’re still projecting a 2% revenue growth in 2025. The primary issue revolves around escalating costs—especially for cocoa. Cocoa prices have surged dramatically, reminiscent of a meme stock’s flight in a market bubble:
Image Caption: Cocoa Bean Price data by YCharts
Why the spike in cocoa costs? A significant portion of the world’s cocoa supply—about 70%—comes from West Africa, where recent adverse weather has disrupted yields and global supply chains. Although Hershey has attempted to counter these costs with price hikes, there’s a limit to how much consumers will bear. Analysts predict cocoa prices will stabilize as the year progresses, assuming no further production hiccups.
Regarding worries about weight loss drugs, Hershey’s management disclosed in a quarterly earnings call that sales haven’t felt any significant impact from GLP-1 agonists. These concerns appear more exaggerated than substantive at the moment.
Hershey Remains a High-Quality and Resilient Business
It’s a fundamental investment principle: Don’t let stock prices alone dictate your view of a company’s value. Market prices fluctuate, but strong businesses tend to thrive over time.
Hershey is not just about chocolate and candy; it’s a business fortified by decades of consistent performance. From household names like Reese’s and Twizzlers to snacks such as Skinny Pop, Hershey products have a special place in American culture, appealing to consumers year-round.
With a return on invested capital averaging over 21% in recent years, Hershey not only brings in profits but does so efficiently. Their cash flow generation further proves this: for every revenue dollar, $0.15 to $0.20 is converted into free cash flow annually. This means that even modest growth can translate into substantial shareholder value, thanks to Hershey’s operational efficiency.
Over the years, Hershey’s stock performance has been impressive, outpacing the S&P 500 index historically with a return exceeding 4,200% since 1989, despite its recent downturn. The current challenges likely aren’t reflective of the business’s fundamental strength, signaling that a rebound could return it to past glory.
A Value Opportunity in Disguise
While Hershey maintains its commitment to dividends—raising them annually for 15 years now—financially supporting these dividends will be a bit tighter than in recent years based on 2025 earnings forecasts. Still, it’s crucial to note that Hershey’s dividend yield rarely reaches current levels:
Image Caption: HSY Dividend Yield data by YCharts
Seeing the dividend yield as high as it is highlights Hershey’s present appeal as a cheaper stock. Nevertheless, the increased yield points to the elevated risks Hershey now faces. The key takeaway for investors is to assess whether they believe these challenges are temporary and will eventually resolve.
If confidence prevails, Hershey could potentially offer great investment returns as it aligns back with historical performance norms. With anticipated relief in cocoa prices over time, the stock’s recovery seems plausible. For now, Hershey stands as a valuable but wounded blue-chip, potentially rewarding for those who include it in a balanced portfolio.
