Hershey (NYSE: HSY) shares may gain sweetness despite record-high cocoa prices

Cocoa prices soared to record highs in 2024, helping to push Hershey (NYSE: HSY) stock down 21% over the last 12 months.
But commodity prices are inherently volatile, and the company has strong fundamentals. So the stock may rebound this year.
Cocoa prices almost tripled last year, thanks to bad weather in African growing regions. That, combined with inflation in other sectors of the economy and falling consumer demand for junk food, pushed down Hershey’s financial performance.
Revenue fell 1.4% in the third quarter, and profit dropped 12.7%. Hershey’s 2% price increase in the fourth quarter wasn’t enough to offset the negative factors.
Moreover, the company lowered its earnings forecast for 2024 as a whole. It now forecasts revenue to be flat and profit to slip 6 to 9%. Full fourth-quarter results are due Feb. 6.
Company officials acknowledge that high prices for cocoa and other inputs will likely continue to weigh on earnings. But, “we will continue to invest to drive top line growth, market share, and innovation that delights consumers,” Steve Voskuil, Hershey’s chief financial officer said in the company’s latest earnings presentation.
Hershey has many strengths
There are some reasons why Hershey may be able to succeed. First is its scale. It controls about a third of the US chocolate market, well ahead of Mars at 30% and private labels at low single digits.
Also, Hershey has strong product innovation, marketing and technology programs. The innovation includes Reese’s Caramel Cups, which Hershey broke out in late 2023, and Shaq-A-Licious XL Gummies, which were introduced last August.
Hershey is wisely spending on fulfillment and technology to meet consumers’ desires and further entrench its standing with leading brick-and-mortar and e-commerce retailers, says Morningstar analyst Erin Lash.
Another positive sign for Hershey: she and others say that consumers aren’t sticking with their purchases of more healthy foods. Some may be relying on anti-obesity drugs instead.
Overall, “even as the near term remains tough, we’re encouraged Hershey continues to scour the business to unlock efficiencies to offset unrelenting cost pressures,” Lash said. Also, “it’s freeing up resources to reinvest in its brands and capabilities to ensure its edge holds over a long horizon.”
Valuations look attractive for Hershey. It has a forward price-earnings ratio of 18.5, well below its five-year average of 23.14 and the S&P 500’s Jan. 17 level of 21.6. The stock traded at $150 on Jan. 23, far below Lash’s fair value estimate of $210.
So Hershey shares may taste sweet this year.