Hershey: The Bear Case Just Melted I’m Upgrading To Bullish While Yielding 3.32%
Hershey delivered a Q2 double beat, raised full-year guidance, and now trades at 17.7x 2027 EPS with a 3.32% yield. Read why HSY stock is upgraded to a buy.
Hershey's Prospects Brighten with Commodity Prices and Strong Quarterly Results
The Hershey Company, a leading player in the confectionery industry, has seen its stock price fluctuate significantly over the past year due to volatile cocoa prices and other market factors. At the end of 2023, the company's valuation appeared attractive, with a dividend yield exceeding 2.5%, prompting some analysts to turn bullish. However, cocoa futures surged in 2024, and by January 2025, downgrades to a neutral rating were issued due to concerns over the company's hedging program and exploding cocoa prices. This downgrade proved accurate as adjusted EPS plummeted 32.66% to $6.31 in 2025, and shares dipped as low as $140.13.
Commodity Prices and Hedging Strategy
In early 2025, cocoa futures were trading at $11,100 per tonne, and concerns were raised about Hershey's hedging program masking the real damage from rising costs. The company's cost of sales grew 5.1% through the first nine months of 2024, while the average cocoa contract purchased jumped 123% year‑over‑year to $3.32 per pound. As the cheap hedges rolled off in 2025, Hershey absorbed the full force of the market, leading to eroded margins. The situation unfolded largely as expected, with shares of Hershey appreciating only 3.30% since January 2025, while the S&P 500 gained 31.12%. When including the dividend, Hershey returned 8.26%, making it a cautious call to stay on the sidelines relative to the index.
Quarterly Results and Guidance
On July 30th, Hershey reported its Q2 2026 results, delivering a double beat with $2.79 billion in revenue and $1.90 in adjusted EPS. This performance was accompanied by an increase in the full‑year guidance to a range of $8.36 to $8.52. The revenue growth of 6.6% year‑over‑year exceeded the consensus estimate by $153.41 million, and the adjusted EPS of $1.90 grew by 57% year‑over‑year, beating the consensus estimate by $0.47. On a GAAP basis, Hershey posted $457.7 million in net income, which translated to $2.26 in diluted EPS, compared with $0.31 in the prior year period.
Financial Performance and Outlook
Organic constant‑currency sales rose 3.6% in the quarter, driven by roughly 12 points of net price realization, while volume fell about 8 points because of elasticity impacts. The LesserEvil acquisition contributed an additional 2.7 points of growth. Margin recovery stood out, with adjusted gross margin expanding by 350 basis points year‑over‑year to 41.6% and adjusted operating margin widening by 450 basis points to 20.2%. Pricing power, lower net commodity costs and productivity savings more than offset higher logistics expenses. Cocoa futures have since declined about 45% from their peak, and with oil prices appearing to have topped out, freight and logistics cost pressure is expected to ease.
Investment Thesis and Valuation
With the current share price at $174.61—27.1% below the 52‑week high of $239.48—and a forward dividend yield of 3.32%, the investment case has turned bullish again. The forward price‑to‑earnings multiple for 2027 is estimated at 17.7 times the projected $9.87 earnings per share. Given Hershey’s demonstrated ability to navigate a severe commodity cycle and the attractive valuation, an upgrade to bullish from neutral is warranted, with a potential return to $200 per share by 2027.
Source: seekingalpha.com · 2026-09-05