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Unpredictable Cocoa Prices Impact Hershey Stock Unpredictable Cocoa Prices Impact Hershey Stock

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In the last two decades, Hershey Foods (HSY) has significantly outperformed the broader markets, with shares rising roughly 657% after accounting for dividends. During this period, the S&P 500 Index ($SPX) has yielded less than 550%.

While the S&P 500 continues to trade near all-time highs, Hershey stock has experienced a 30% decline from its record levels. This drop values the company at $39 billion by market cap. The ongoing pullback raises the question of whether it provides investors with an opportunity to buy the dip and reap substantial gains in the future.

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Evaluating Hersheyโ€™s Performance in Q4 of 2023

Hershey is a globally recognized brand, manufacturing and selling confectionery products and pantry items in the U.S. and other international markets.

During Q4 of 2024, Hershey reported sales of $2.66 billion, marking a marginal 0.2% year-over-year increase. Wall Street had anticipated a 2% growth in sales. Although sales fell short of estimates, Hershey reported earnings of $2.02 per share in Q4, surpassing the estimated $1.95 per share. Despite lackluster numbers, Hersheyโ€™s stock surged over 4% following its Q4 results. Investors continue to express bullish sentiments towards Hershey, citing its emphasis on cost optimization and the recent 15% dividend hike. This increment raised the quarterly dividend to $1.37 per share from $1.245 per share, yielding 2.87% at current levels. Over the past two decades, its dividends have seen an annual increase of over 10%, thereby boosting the effective yield over time.

The Impact of Soaring Cocoa Prices in 2024

For 2024, Hershey anticipates revenue growth to range between 2% and 3%, with earnings expected to remain stagnant. Analysts had projected a 3.4% increase in sales and a 12% rise in profits for 2024. Hershey attributes the surge in cocoa prices to unfavorable weather conditions in West Africa, a significant producer of the commodity. Over the past year, cocoa futures (CAK24) have approximately doubled, and have shown signs of further increment in recent trading following a slight retreat from record-high territory on Friday.

Following this guidance, investment bank Morgan Stanley (MS) downgraded HSY stock from โ€œequal-weightโ€ to โ€œunderweight,โ€ revising the price target to $183 from $191. This decision stems from Hersheyโ€™s sluggish earnings growth, directly impacted by the 18% of the companyโ€™s cost of goods sold attributed to cocoa prices. Rising input costs are expected to exert significant pressure on the companyโ€™s bottom line over the next two years. Additionally, Morgan Stanley cited rising competition and weakening demand in the salty snacks segment as contributing factors to the downgrade.

Projected Target Price for Hershey Stock

Analysts tracking Hersheyโ€™s stock anticipate an 8% annual growth in earnings between 2024 and 2028. Currently priced at 20 times forward earnings, Hershey may appear costly amidst struggles to bolster its bottom line. Nonetheless, analysts maintain a bullish stance. Out of the 22 analysts covering HSY, seven recommend a โ€œstrong buy,โ€ 14 suggest โ€œhold,โ€ and one recommends โ€œstrong sell,โ€ culminating in a consensus opinion of โ€œmoderate buy.โ€ The average target price for the stock stands at $218, reflecting a potential upside of 12.7%.

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On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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