Elevated Cocoa Costs And Health Trends Will Challenge Future Demand

Key Takeaways

• Elevated cocoa costs and potential consumer resistance to price hikes might hinder Hershey's revenue growth despite planned efficiency strategies.
  
• Competitive pressures and a consumer trend towards healthier options could challenge Hershey's market share and international growth, especially in Brazil and Mexico.
  
• Strategic pricing, supply diversification, and innovation in non-chocolate products enhance Hershey's resilience against cocoa cost pressures and support revenue growth.

Catalysts

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

• Hershey is facing pressures from elevated cocoa prices, and while they plan to manage this through pricing, productivity, and efficiency strategies, any missteps or consumer resistance to price increases could negatively impact revenue growth.
  
• The company is planning for elasticity impacts at a minus 1 level, assuming historic price sensitivity, but if consumers are more elastic than expected, this could lead to volume declines, adversely affecting revenue.
  
• Hershey has highlighted weaker growth prospects in their international segment due to competitive pressures, especially in Brazil and Mexico, which may limit revenue growth opportunities outside the North American market.
  
• Competitive activity and innovation challenges in everyday chocolate, combined with a consumer shift toward healthier options and sweets, could continue to pressure Hershey’s market share and margins.
  
• Potential setbacks in convenience channel sales, due to macroeconomic pressures on consumers and category softness, might affect revenue growth, especially in instant consumables, impacting overall earnings performance.

Hershey Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hershey's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.8% today to 14.3% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $8.07) by about April 2028, down from $2.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.1 billion in earnings, and the most bearish expecting $1.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.1x on those 2028 earnings, up from 14.5x today. This future PE is greater than the current PE for the US Food industry at 16.4x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Hershey Future Earnings Per Share Growth

Risks

• Hershey's ability to effectively hedge cocoa prices could mitigate the impact of current elevated cocoa costs, potentially protecting profit margins and supporting earnings growth.
  
• The company's strategic pricing adjustments and elasticities coming in on par or better than expected indicate resilience in consumer demand, which could sustain revenue levels.
  
• The diversification of cocoa supply sources and production increase beyond the Ivory Coast and Ghana could enhance long-term supply stability, reducing cost pressures and improving net margins.
  
• Investments in innovation and product expansion, particularly in non-chocolate sweets, could drive incremental revenue and offset any potential dips in chocolate sales.
  
• The company's strong performance and strategic growth in international markets could contribute positively to overall revenue, even amid competitive pressures.

Valuation

• The analysts have a consensus price target of $163.522 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 $211.56, and the most bearish reporting a price target of just $120.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.0 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 23.1x, assuming you use a discount rate of 6.2%.
• Given the current share price of $159.1, the analyst price target of $163.52 is 2.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.