NEW YORK โEven as the company faces sharply higher cocoa prices this year and next, The Hershey Co. continues to benefit from strong management and its leadership position in the confectionery category, said Robert Moskow, an analyst with TD Cowen. He sees Hersheyโs stock treading water in the near term.
Moskow discussed the cocoa situation in an April 2 company update. TD Cowen maintains a hold rating for Hershey with a $205 per share target price, about $7 per share above the April 1 closing price for Hershey.
โHershey is a proven value-creator in the food space due to its leadership position in the attractive confectionery category, its pricing power, and managementโs investments to expand its competitive moat,โ Moskow said. โHowever, we expect the stock to remain rangebound until the company demonstrates a clearer path toward revenue growth reacceleration and market share improvement, and therefore are on the sidelines.โ
The range of prospective outcomes for Hershey are โtoo wide to navigate right now,โ Moskow said, because of volatility in the cocoa market.
July cocoa future prices recently topped $9,300 per tonne, more than triple prices of about $2,900 a year earlier.
Moskow noted that higher cocoa prices take about a year to reach consumers โbecause the processors protect the price points in seasonal merchandising they have already sold into the trade.โ
Indeed, recent cocoa powder prices as published in Food Business News of $2.05 per lb were up a more modest 36% from a year earlier.
โBased on managementโs commentary about a โlow double-digit COGS inflationโ impact in 2024 from cocoa and sugar, we believe that Hershey locked in its cocoa costs for 2024 at about $4,350 per tonne, which is about 50% above where we estimate it was positioned in 2023 at $2,900,โ Moskow said. โFor now, Hershey has delayed raising prices, choosing instead to introduce $100 million of cost savings from selling, general and administrative cuts on top of its normal productivity.โ
In its analysis, Cowen estimates that cocoa accounted for a fifth of Hersheyโs cost of goods sold in 2023.
In the firmโs forecasts, TD Cowen projects Hersheyโs operating margin to narrow from 24.2% in 2023 to 22.8% this year and 21.9% next year. Operating profits are expected to hold fairly stable during this period โ $2.7 billion in 2023, $2.61 billion in 2024 and 2.66 billion in 2025. Moskow called a 12% decrease in operating profit in 2025 a โworst case scenario.โ
โIn this scenario, Hershey raises prices by 19%, but volume declines 10% due to elasticity, thus making it too difficult for Hershey to offset the inflationary impact,โ he said.
Over this same period, Moskow said cocoa prices are expected to rise from $2,900 in 2023 to $4,350 in 2024 and $6,308 in 2025.
The operating profit scenarios are based on Hershey achieving $150 million and $160 million in benefits this year and next, respectively, from the companyโs $400 million supply chain productivity program launched last year.
