Mounting Regulatory Pressures And Volatile Cocoa Will Weaken Outlook

Key Takeaways

• Shifting consumer preferences, regulatory pressures, and rising costs threaten Hershey’s core confectionery business and profitability outlook.
  
• Limited global growth and rising competition from healthier alternatives amplify risks to market share and future revenue.
  
• Focus on innovation, diversification, and operational improvements is strengthening Hershey’s market position, brand resilience, and ability to manage input cost challenges.

Catalysts

Engages in the manufacture and sale of confectionery products and pantry items in the United States and internationally.

• Hershey's core business remains heavily exposed to traditional confectionery products, which face mounting long-term challenges from increasing consumer demand for healthier, lower-sugar snacks and growing global health awareness. These pressures are likely to erode future revenue growth as regulatory actions such as sugar taxes and stricter labeling further restrict marketing and sales.
  
• Elevated and volatile cocoa prices, driven by climate change and political instability in key producing countries, are creating sustained raw material cost inflation. With the company indicating gross margin declines of up to 700 basis points and the threat of additional $100 million quarterly tariff headwinds, net margins and profitability are vulnerable to further compression in the coming years.
  
• Hershey’s relatively slow pace of international expansion compared to global peers constrains avenues for future growth, intensifying its reliance on a mature North American market where consumption is more likely to stagnate or decline, capping top-line expansion opportunities.
  
• Competition is intensifying, both from premium and value confectionery entrants and alternative snack categories such as healthy bars and plant-based offerings; this dynamic threatens Hershey’s market share and pricing power, posing a risk to future operating earnings.
  
• Increasing ESG requirements and scrutiny of supply chain practices—including deforestation and child labor in cocoa production—will require higher compliance and sourcing costs, putting further downward pressure on margins and exposing the business to reputational risks and possible regulatory penalties in the future.

Hershey Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Hershey compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hershey's revenue will grow by 3.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 15.3% today to 11.4% in 3 years time.
• The bearish analysts expect earnings to reach $1.4 billion (and earnings per share of $6.65) by about July 2028, down from $1.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 22.7x on those 2028 earnings, up from 22.5x today. This future PE is greater than the current PE for the US Food industry at 19.2x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.4%, as per the Simply Wall St company report.

Hershey Future Earnings Per Share Growth

Risks

• Despite near-term challenges from tariffs and high cocoa prices, Hershey management maintains confidence in their ability to return to earnings growth as soon as 2026, even if input pressures persist, especially as mitigation actions like productivity improvements, price optimization, and sourcing adaptations are activated, which could support future earnings.
  
• Hershey continues to gain or sustain market share in key categories, reporting strong results in sweets and everyday chocolate, as well as seasonal segments where recent capacity expansions have unlocked new sales, indicating ongoing brand resilience and demand, which can help stabilize or grow revenues and profits.
  
• Ongoing investments in innovation, such as what management described as potentially the biggest innovation ever for Reese’s in the coming fall and robust pipeline for new sweets and salty snack products, supports the company's ability to drive incremental growth and maintain pricing power, potentially boosting future revenue and margins.
  
• Hershey’s diversification into better-for-you snacks and salty categories through targeted acquisitions (e.g., SkinnyPop, Dot’s, Lesser Evil) is expanding its consumer base and decreasing reliance on traditional confectionery, making revenues more resilient and less vulnerable to shifts in consumer health preferences.
  
• Supply chain investments and greater vertical integration (for example, the new chocolate paste plant) have improved operational agility, capacity, and cost control, equipping Hershey to better manage commodity volatility, drive efficiency gains, and potentially enhance net margins over the long term.

Valuation

• The assumed bearish price target for Hershey is $126.32, which represents two standard deviations below the consensus price target of $166.43. This valuation is based on what can be assumed as the expectations of Hershey's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $211.0, and the most bearish reporting a price target of just $123.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $11.9 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 6.4%.
• Given the current share price of $183.23, the bearish analyst price target of $126.32 is 45.0% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.