The Hershey Company (NYSE:HSY): A Discounted Sweet Treat
We came across a bullish thesis on The Hershey Company (NYSE:HSY) on ValueInvestorsClub by angus309. In this article, we will summarize the bulls' thesis on HSY. The company's shares were trading at $186.36 when this thesis was published, vs. the closing price of $163.28 on Apr 25.
The Hershey Company (HSY): Among Takeover Rumors Hedge Funds Are Buying
A close-up of hands deftly molding a bar of chocolate.
HSY manufactures and sells confectionery products and pantry items in the United States and internationally through its three segments: North America Confectionery, North America Salty Snacks, and International. It controls 36% of the chocolate market in the US with high single-digit sales coming from international markets like Mexico, Brazil and India.
The stock is down almost 40% from its peak in 2023 due to a number of reasons. First, the launch of the weight-loss drug Ozempic by Novo Nordisk has been a popular hit due to its effectiveness. It is estimated that people will consume 20-30% fewer calories due to the influence of this medication, thereby impacting the sales of HSY. Another factor for underperformance is the torrential rains in Ghana and Ivory Coast leading to black pod disease and lower yield. HSY is expected to face higher input costs, which would reduce margins.
While these headwinds are valid arguments by bears, HSY has been in the business for over a century. The likelihood of Americans reducing their intake of chocolates seems far-fetched when considering long-term consumption patterns. Moreover, HSY has expanded beyond chocolates and offers products like SkinnyPop popcorn and Dot's Pretzels that can provide a hedge if consumers shy away from high-calorie treats. The concern surrounding mounting input costs can also be dealt with since HSY has the flexibility to pass on increased costs to its customers. This was done in 2023 when a 10% hike in price enabled HSY to increase its revenue by 11% without a major drop in volume.
The popularity of Feastables by Mr. Beast is another potential cause for concern. The brand is set to grow exponentially but the ability to capture market share may be constrained by lack of scale in manufacturing and distribution. HSY can also turn the tide by launching healthier versions that may offer direct competition to Feastables.
HSY is trading at 15x trailing 12-month earnings, which seems unjustified for a company that saw its earnings grow by almost 15% from 2007 to 2023. The forward dividend yield is close to 3.4%, with ROIC exceeding WACC by 18 percentage points. Factoring in a high capital return, a growing dividend and a multiple higher than the S&P 500, the fair value of HSY's stock is $225. This is 40% higher than the current market price.
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