Tariff Mitigation And New Reese's Product Will Create Opportunity

Key Takeaways

• Strategic diversification into new snack categories alongside innovations like Reese's could drive market share gains and incremental revenue growth.
  
• Mitigating tariff impacts through productivity and pricing strategies may stabilize or improve net margins and earnings.
  
• High cocoa prices and a challenging competitive landscape threaten Hershey's margins, revenue growth, and market position amidst a weaker consumer environment.

Catalysts

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

• The Hershey Company is actively focusing on mitigating the impact of tariffs, particularly those related to cocoa and Canadian imports, through productivity enhancements, pricing strategies, sourcing adjustments, and manufacturing changes. This could help stabilize or improve net margins and earnings if tariffs are reduced or successfully mitigated.
  
• A stronger focus on price pack architecture and demand shaping, especially within less cocoa-intensive product lines, could optimize revenue growth and margin preservation, aiding in sophisticated revenue growth management.
  
• Hershey’s innovation pipeline, particularly with the upcoming significant Reese's innovation, is poised to drive incremental market share gains and increased sales, promising revenue growth and potentially improving earnings given successful execution.
  
• The company is investing in its chocolate processing capacity, aiming for more agility and better management of supply chains, which should provide long-term revenue growth through increased production and efficiency improvements, positively impacting net margins.
  
• Hershey's expansion into sweets and better-for-you snacks categories alongside salty snacks with new acquisitions indicates strategic diversification beyond just chocolate, poised to capture additional market share and drive incremental revenue growth, potentially improving profitability in the long term.

Hershey Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hershey's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.3% today to 14.4% in 3 years time.
• Analysts expect earnings to reach $1.8 billion (and earnings per share of $8.29) by about July 2028, up from $1.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.2 billion in earnings, and the most bearish expecting $1.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.3x on those 2028 earnings, up from 22.9x today. This future PE is greater than the current PE for the US Food industry at 19.6x.
• 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

• Uncertainties around tariff exemptions could lead to additional costs of up to $100 million per quarter in Q3 and Q4 if mitigation efforts are not successful, potentially impacting earnings.
  
• Expected declines in EPS, with guidance for the first half of 2025 projecting a 30% decrease, and potential for further declines in the second half, impacting overall earnings.
  
• High cocoa prices continue to exert pressure on margins and may necessitate further cost management strategies, impacting gross margins.
  
• The weaker consumer environment and value-seeking behaviors could affect revenue growth, especially in snacking and confections.
  
• The competitive landscape remains challenging, particularly with new and smaller players gaining shelf space and market share, potentially affecting revenue and market position.

Valuation

• The analysts have a consensus price target of $166.87 for Hershey based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $12.2 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 6.4%.
• Given the current share price of $186.23, the analyst price target of $166.87 is 11.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.