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Hershey’s Stock Rating Downgraded Amid Sales Challenges
Bernstein SocGen Group has revised its rating on Hershey (NYSE:HSY), moving it from “Outperform” to “Market Perform” and lowering the price target from $230 to $205. This adjustment follows disappointing performances in chocolate sales, which fell short of initial expectations after the company’s recent product launch.
Earlier in 2024, Bernstein had expressed optimism about Hershey’s prospects following the release of Reese’s Caramels in November 2023, viewed as the company’s most significant product introduction in the post-pandemic era. The launch was anticipated to significantly enhance sales as Hershey completed its SAP transition in the second quarter of 2024. However, actual volume growth has failed to meet these expectations, with the chocolate segment continuing to see a decline.
Despite the comparison to weaker sales periods from previous years, Hershey’s chocolate volume challenges remain a pressing issue, contributing to the downgrade. Furthermore, rising cocoa prices throughout 2024 have added strain to the company’s profit margins, compounding issues within the chocolate category.
Bernstein analysts suggest that while there may be some easing of cocoa cost pressures soon, major improvements in Hershey’s profit margins are not likely until 2026. This forecast of slow recovery has been a significant factor in their decision to downgrade the stock rating and the price target.
Additional analyst assessments have also taken a critical stance on Hershey’s financial outlook. UBS has lowered Hershey’s stock from Buy to Neutral, raising concerns about optimistic earnings forecasts for 2025 in light of ongoing cost pressures and fluctuating consumer demand.
Downgrades have come from Jefferies, Barclays, and Citi as well, centering on various issues including pricing strategy challenges, competitive pressures in the snack arena, and declining consumption patterns affecting gross margins.
In response to market conditions, Hershey has implemented a 12% price increase on nearly half of its product offerings, which RBC suggests could bolster the company’s financial position, especially as competitor Mars plans to raise prices across its portfolio.
In a management update, Michael Del Pozzo has been appointed as the new President of Hershey’s U.S. Confection segment. Del Pozzo, with a robust background from PepsiCo, is expected to lead the company’s growth strategies domestically.
These developments underscore the ongoing challenges Hershey faces, as the company actively seeks ways to maneuver through a complex market landscape.
InvestingPro Insights
In light of Bernstein’s analysis, InvestingPro provides additional insights into Hershey’s situation. Despite current hurdles, Hershey preserves a notable dividend track record, having increased its dividend for 14 consecutive years and maintained payments for 54 years. This history of consistent dividend growth is likely to attract income-seeking investors, even amid present challenges.
However, aligning with concerns regarding Hershey’s performance, recent data shows that the company’s revenue growth over the last twelve months, as of Q2 2024, was modest at 1.44%, with a notable 16.7% decrease in quarterly revenue for Q2 2024. These statistics lend weight to analysts’ comments regarding disappointing chocolate volume and sales outcomes.
On the valuation side, Hershey is reported to be trading at a high price-to-earnings (P/E) ratio compared to its near-term earnings growth, reflected in a PEG ratio of 5.38 for Q2 2024. This suggests potential overvaluation risk, in alignment with the recent downgrade to “Market Perform.”
For investors interested in a deeper financial analysis, InvestingPro offers a range of insights and additional tips regarding Hershey, providing a fuller picture of the company’s market standing and economic health.
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