Innovative Collaborations And Calculated Expansions Set To Sweeten Confectioner's Growth Path

Key Takeaways

• Introduction of innovative products and collaborations, such as the Shaq-a-licious gummy line, aims to boost consumer interest and drive revenue growth.
  
• Strategic pricing and investment in technology and supply chain improvements are expected to balance inflation pressures and reduce costs, enhancing margins and earnings.
  
• Hershey faces potential revenue and margin pressures from decreased discretionary spending, higher cocoa costs, and challenges within specific product segments.

Catalysts

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

• Introduction of innovative products and collaboration with popular figures such as the Shaq-a-licious extra large gummy line, which is likely to boost consumer interest and drive revenue growth through increased product differentiation and market penetration.
  
• Expansion into high-growth retail channels like e-commerce and club stores, addressing underdeveloped market segments for confectionery, which could lead to increased sales volumes and market share expansion, enhancing revenue growth.
  
• Strategic pricing actions to offset rising cocoa prices, aiming to balance raw material inflation with competitive pricing and value to consumers, which can help maintain or improve net margins over time.
  
• Investment in technology and supply chain improvements, including ERP implementation success, expected to improve efficiency, reduce costs, and enhance service levels, potentially leading to better margins and earnings due to operational efficiencies.
  
• Strong seasonal marketing and merchandising campaigns focused around occasions like Halloween and holidays, expected to drive higher sales through increased consumer engagement and purchase intent, positively impacting revenue and earnings in seasonal peak periods.

Assumptions

• Analysts are assuming Hershey's revenue will grow by 3.5% annually over the next 3 years.
• Analysts are assuming Hershey's profit margins will remain the same at 16.8% over the next 3 years.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $10.53) by about September 2027, up from $1.8 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.7x on those 2027 earnings, up from 21.2x today. This future PE is greater than the current PE for the US Food industry at 19.3x.
• Analysts expect the number of shares outstanding to decline by 1.07% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The pullback in discretionary spending by consumers may lead to a decline in demand for Hershey's products, impacting revenue.
  
• A slowdown in the convenience channel, where Hershey has significant strength, could lead to decreased sales, affecting both revenue and net margins.
  
• Increasing cocoa prices, despite a robust hedging program, could elevate production costs, compressing gross margins if pricing adjustments do not offset these cost increases effectively.
  
• The ERP implementation, while deemed successful, carries inherent risks of operational disruptions that could affect service levels and financial performance in the short term.
  
• Softness in the ready-to-eat popcorn category and challenges in stabilizing SkinnyPop sales may affect the Salty Snacks segment's revenue growth and profitability.

Valuation

• The analysts have a consensus price target of $202.17 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 $232.0, and the most bearish reporting a price target of just $163.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $12.2 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 5.8%.
• Given the current share price of $193.36, the analyst's price target of $202.17 is 4.4% 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.