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As cocoa prices reach a record high of nearly $5,800 per ton, investors are bracing for the impact on major chocolate stocks. The surge in cocoa prices can be attributed to supply concerns and the outbreak of the cacao swollen shoot virus, which has already compromised a substantial portion of the supply. Dry weather conditions in Ghana and Nigeria further exacerbate the situation, posing a threat to soil moisture levels and production yield. These developments have led to key chocolate stocks facing significant headwinds.
The staggering surge in cocoa futures, doubling over the past year and rising 40% since January, coupled with increased prices of sugar, labor, and other production inputs, is expected to translate to higher prices for consumers, presenting a daunting challenge for chocolate companies and their customers alike.
With analysts predicting a prolonged period of chaos, investors are advised to steer clear of chocolate stocks, especially those sensitive to higher cocoa prices such as:
Hershey (HSY)
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After reaching its peak in mid-2023 at around $270, Hershey (NYSE: HSY) now trades at $191.16, navigating the choppy waters of inflation and apprehensions surrounding weight loss drugs disrupting the industry. CEO Michele Buck, cited by Yahoo Finance, anticipates that cocoa prices will impede Hershey’s growth this year. However, despite beating expectations with an EPS of $2.02 in its most recent report, the company posted a mere 0.4% year-over-year increase in revenue, falling short by $60 million. HSY’s guidance indicates an anticipated net sales growth of 2% to 3%, below the estimated 3.43%. Morgan Stanley analysts downgraded HSY to an underweight rating, citing softer demand and the impact of higher cocoa prices on profitability. The firm also slashed its price target on HSY to $183 per share, positioning the stock as one to avoid at this point.
Nestle (NSRGY)
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Following its peak around $130, Nestle (OTCMKTS: NSRGY) is now trading at $110.23, grappling with the impact of inflation, weakened consumer demand, and elevated cocoa prices. The company’s last earnings report highlighted a lower-than-expected organic growth rate of 7.8%, trailing the projected 8.1%. Analysts at BNP Paribas downgraded the stock to an underperform rating, while Deutsche Bank reduced its price target in recent months, suggesting that investors should avoid Nestle at its current valuation until the cocoa and inflation headwinds abate.
Mondelez (MDLZ)
Chocolate Struggles: Mondelez Faces Pricing Pressure Amid Cocoa Crisis
Mondelez (NASDAQ:MDLZ) is currently facing a significant challenge due to soaring cocoa prices. The company is set to implement further price increases, particularly in Europe, in a bid to offset the impact of escalating cocoa costs. However, this move may potentially lead to lower sales in the region, prompting caution among investors.
A Bitter Reality: Cocoa Prices Surge
With cocoa prices hitting a four-decade high of over $4,700 per metric ton, Mondelez is grappling with a substantial increase in input costs. As a result, the company is expected to enforce high single-digit price hikes in 2024, mainly driven by the surge in cocoa prices.
This situation presents a complex challenge for the multinational confectionery giant as it navigates the delicate balance between cost recovery and maintaining competitive pricing in the market.
European Market Dilemma
Despite price hikes of 12% to 15% on Mondelez chocolate products in Europe last year, the company is likely to encounter pushback from retailers in the region. Reuters highlights the potential for lower sales due to resistance to price increases, adding further complexity to Mondelez’s pricing strategy and market positioning.
Investment Caution Advised
Given the uncertain trajectory of cocoa prices and the potential implications on Mondelez’s pricing strategy and market performance, investors are advised to exercise caution. Until there is greater clarity on the resolution of the cocoa crisis and the subsequent pricing impact, it may be prudent to approach investments in Mondelez with a measure of restraint.
It would be prudent for investors to scrutinize potential investments in Mondelez through the lens of this ongoing cocoa crisis and the company’s response to the multifaceted challenges it presents.
On the date of publication, Ian Cooper did not hold (either directly or indirectly) any positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
