Price Increases And Cost Savings Will Offset Higher Costs As Leadership And Marketing Investments Improve Future Market Position

Key Takeaways

• Price increases and strategic cost-saving initiatives aim to offset higher costs and bolster revenue and net margins.
  
• Enhanced leadership and increased marketing investments focus on improving market share and driving top-line growth.
  
• High cocoa prices, competitive pricing, and retail inventory challenges threaten Hershey's margins and revenue growth amid financial pressures on consumers.

Catalysts

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

• Hershey is planning to implement price increases similar to the past year, which could boost revenue growth by offsetting higher costs, particularly in response to cocoa price inflation.
  
• The company anticipates fewer headwinds in 2025 compared to 2024, including recovery from inventory adjustments and challenges in specific markets, which could stabilize revenue growth and improve net margins.
  
• New leadership in North America Confectionery is expected to enhance execution, with a focus on stronger retail partnerships and more effective in-store strategies, potentially improving market share and revenue growth.
  
• Hershey plans to bolster media and marketing investments, especially in instant consumables and variety brands, to drive top-line growth and capture market share.
  
• Ongoing cost savings through productivity programs and the potential for stronger growth in segments like Salty Snacks and international markets may positively impact earnings and net margins.

Hershey Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hershey's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.2% today to 16.4% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $9.49) by about December 2027, up from $1.8 billion today. The analysts are largely in agreement about this estimate.
• 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 2027 earnings, up from 20.3x today. This future PE is greater than the current PE for the US Food industry at 20.5x.
• Analysts expect the number of shares outstanding to grow by 0.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Hershey Future Earnings Per Share Growth

Risks

• High cocoa prices are expected to be a significant source of inflation, which could negatively impact margins and profitability.
  
• Lower volumes coupled with adverse sales mix and volume deleverage have negatively impacted gross margins, indicating potential challenges in maintaining profit margins.
  
• Increased competitive pricing activity, particularly in international markets, could pressure revenue growth and market share.
  
• Challenges with retail inventory dynamics and execution issues may affect sales projections and revenue stability.
  
• Financial pressures on consumers and a potential mild impact from GLP-1 drugs could challenge revenue projections if changes in consumer behavior affect demand for snack categories.

Valuation

• The analysts have a consensus price target of $184.53 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 $222.0, and the most bearish reporting a price target of just $153.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $12.0 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 23.1x, assuming you use a discount rate of 5.9%.
• Given the current share price of $177.63, the analyst's price target of $184.53 is 3.7% 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.