Why Hershey's Is Poised for a Comeback
Throughout a volatile stretch Hersheys has faced significant pressures marked by geopolitical instability, supply chain disruptions and factors related to the production of Cocoa, input costs have risen to multi-decade highs for the very goods the company specializes in. Despite these headwinds, market forces and the initial signs of a turnaround are in view, with elevated prices and improving supply conditions starting to ease cost pressures. Hershey's may be entering the beginning of an earnings recovery. While the stock has long been battered by a dramatic increase in these costs with a collective decline of 41% to 162 a share from its all time high of 272 a share in May 2023, the company's, resilient brand equity, diversification/acquisition efforts suggest a favorable risk reward setup towards improving financials in the interim. Do not mistake Hersheys as being only a brand related to chocolate bars, the company lays claim to an impressive suite of brands, including its crown jewel, the most popular candy in the entire United States: Reese's peanut butter cups as well as an expanding portfolio of non-chocolate snacks.
Cocoa Prices: Developments and Outlook
Cocoa trees typically take 5–7 years to mature, and the prices for both delivery and futures of cocoa have skyrocketed due to a sharp decline in output from the Ivory Coast and especially Ghana (which represented historically 15-18% of global cocoa production). The sharp decline comes in from a range of factors hitting local farmers especially hard and the ability to grow, specifically within Ghana, the Ghanan Cocoa Board- a government agency monopolizing the external trade of cocoa has an unsustainable and rapidly growing debt crisis while facing the consequences of its past failures and corruption. Farmers were not paid enough relative to the work being done, and it has been cheaper to allow mining encroachment on land historically used for growing cocoa. The failure of the Ghanan Cocoa Board in supporting the farmers and actual producers of cocoa while recklessly financing expenditure through irresponsible use of contracts is hitting production incredibly hard and is likely to have lasting damage (as seen in cocoa prices). The weak production numbers being attributed to seasonal rains is not fully to blame as the true cause and effects are much more nuanced.
While the Ghana situation would seem to be a disaster, the worst of the production gap seems to be priced in. Futures prices have already factored in significant disruption and the massive increases in cocoa prices have made planting the cacao tree a much more economically feasible outlay in other regions of cocoa production such as Indonesia and South America, do not mistake this as a short term turnaround although global markets are fairly efficient and are allocating towards profitable ventures such as farming cocoa at such elevated prices. Not an overnight fix although the drivers and capacity are there.
As new trees planted during the crisis begin to reach maturity, the supply shock is expected to ease over the next several years. Hershey's, which hedges its cocoa input costs far in advance, will likely see lagged but accretive margin expansion as prices stabilize or retrace from record highs. The dramatic shock realized by a chocolate/confectionary company facing higher cocoa prices would seem to have already hit, with a nearly 100 a share/41% decline from its share price highs in 2023. Prior to the production issues faced in West Africa ravaging Cocoa production, Hershey's was earning nearly 11 a share in eps (based on current prices this would represent a 15 earnings multiple), for the patient investor, this would seem to be a setup for future EPS normalization as the output of cocoa returns to historical levels over the next few years.
The current CEO and 20 year veteran of the company recently announced a surprise departure and is stepping down from the role, while Kirk Tanner the unproven Wendy's executive is now at the helm, given the performance and direction of the company being related to external shocks and cost drivers rather than positioning, this would not seem to have any bearing on the operations of the company. The real driver of Hersheys and its earnings will ultimately be the growth of salty snacks, and the costs of input related to cocoa and sugar sourcing, something unchanged by an executive shakeup as operations are already in place.
*Investopedia Cocoa Futures History
Sugar Prices Plunging, a Tailwind to EPS
Meanwhile, sugar a critical secondary input for confectionery which initially exploded during the same time frame of cocoa prices hitting Hersheys with a second catastrophe, sugar prices have quietly seen a dramatic pullback. From recent highs around 27 cents per pound, sugar futures have corrected to the 16-cent range. For a company like Hershey's with major exposure to sugary snacks and beverages, this decline is highly accretive to gross margin. Even modest operating leverage here would create a meaningful tailwind to EPS in the coming quarters albeit at a delay.
*Investopedia Sugar Futures History
Not Just Chocolate Anymore
Hershey's growth isn't confined to cocoa. The company's strategic investment in salty snacks and better-for-you categories, products such as Pirate's Booty, SkinnyPop, Dot's Pretzels has quietly transformed the earnings profile. Through its 1.6 billion dollar 2021 acquisition of Dots Pretzels, the segment has seen significant growth and expansion, with new product releases and pretzel flavors and continued revenue increases even in times of distress. As salty snacks is the only segment that saw growth in the most recent quarter (isolated from Cocoa issues) this acquisition is not only a clear success, helping offset stagnation in traditional chocolate but also a prudent M&A execution. The product mix shift adds resilience to the brand and allows management to refocus marketing and distribution on higher-margin, diversified lines.
GLP-1 Drugs Aren't Killing Chocolate
The explosive growth of GLP-1 weight-loss drugs like Wegovy
and Ozempic has sparked fears that demand for indulgent foods chocolate,
snacks, soda could structurally decline. Hershey's, in particular, has been
flagged as vulnerable. But those concerns are overblown.
First, GLP-1 users are still a small fraction of the
population. Even if adoption expands, these drugs are primarily prescribed to
patients with severe obesity or diabetes this is hardly the core customer base
for an occasional chocolate bar. Hershey's isn't selling candy to people
looking to replace their meals; it's selling to people looking for a treat or
snack, also bolstered by spending in holidays such as Halloween, valentines and
Easter which realistically would not see impacts of weight loss drugs.
Second, consumption isn't always rational. Food is cultural,
social, and emotional. People don't eat Hershey's because they're hungry, they
eat it as a comfort. GLP-1s may suppress appetite, but they don't eliminate
cravings, nostalgia, or impulse buying. Studies even show many users continue
to snack; they just eat less overall, not less of everything.
Third, Hershey's is diversifying. Its salty snack portfolio Dot's
Pretzels, SkinnyPop, Pirate's Booty is growing faster than traditional candy,
and better aligns with evolving consumer preferences. These are products with
“permissible indulgence” appeal and strong brand power, regardless of whether
the buyer is on said drugs.
Finally, even if there's modest volume pressure ahead, the
pricing power and premium brand equity Hershey's holds gives it room to
maneuver. It's not a volume play, it's a brand play with staples such as Reese's which have survived over a century.
Valuation: An Opportunity for Normalization
Admittedly, price-to-earnings multiples look elevated (25 earnings multiple) due to depressed trailing earnings. But this is a textbook case where a rearview mirror approach misleads. If earnings normalize even back to 2022 levels current multiples would compress meaningfully. The setup is not unlike other staples stocks in recent history: an earnings trough masked by mid term cost inflation. Long-term pricing power, brand strength, and improving cost structure should support a return to historical EPS growth trends, while the EPS will likely not show immediate improvement, over time as the cocoa crisis fades, a return to the 2024 level of 11 eps is possible on cost/input prices reduction alone (assuming no business expansion) and would set the company at a deeply discounted 15 price to earnings.
Hershey's isn't exciting, but it's set for a return to normalcy, with the worst of cocoa inflation likely to be behind us in the near future, sugar costs plunging, and supply chains healing, HSY offers an underappreciated recovery story. Add in growing success in non-chocolate categories, and this “boring” consumer staple could be set for a comeback. The business world is bound by reality and if you are expecting it to be a smooth ride or a rapid recovery, this stock is likely not for you, for those who can be patient, the stock is set up for a solid return.
