Hershey: This (Cocoa Price) Too Shall Pass; Upgrade to Buy
Company Update (HSY US) (Buy): HSY at 19x 2023 EPS, 3% Dividend Yield; even if cocoa prices stay at current levels, we expect a 12% IRR by 2026 year-end.
Highlights
Cocoa is ~15% of COGS and coca prices have tripled since 2023.
2024 EPS is guided to be flat, thanks to hedges and cost savings.
EPS may halve in 2025 if cocoa prices stay high, but rebound in 2026.
We believe EPS growth will resume and P/E re-rate to 25x eventually.
With shares at $184.66, we see a 36% total return (12.4% IRR) by 2026.
Introduction
We revisit Hershey a year after we last wrote about the company and assigned it a Neutral rating. Since then Hershey’s share price has fallen 29%, and is back to the level it was at in December 2021:
Hershey Share Price (Last 5 Years)
Source: Google Finance (18-Apr-24).
We believe Hershey’s share price decline can be largely attributed to the earnings impact of the dramatic rise in cocoa prices. The cost of cocoa products likely represented ~15% of Cost of Sales or ~8% of Net Sales in 2023.
At $184.86, Hershey shares have fallen 33% from their peak in May 2023; they now show a 19.1x P/E relative to 2023 earnings and a 3.0% Dividend Yield.
The current 2024 outlook (released in February) is for a flat Adjusted EPS, but is helped by cocoa futures purchased in 2023 as well as cost savings, a lower tax rate and buybacks. This outlook does not assume any new price increases after February, which are difficult given ongoing IT projects.
2025 earnings are likely where cocoa headwinds will materialize, as Hershey appears to not have hedged that far ahead and cocoa prices have doubled again since February; simplistically, Adjusted EPS can nearly halve.
Nonetheless, we believe there is an investment case for long-term shareholders based on:
Cocoa prices not rising significantly further from their current level
Hershey earnings rebounding in 2026 to close to its 2023 level and resume their long-term growth algorithm
Hershey’s P/E rebounding to 25x in 2026