Sweet Savior? The Hershey Co. Hypothesis

I would hold The Hershey Company (HSY) amid the current market turmoil.

Despite severe headwinds from elevated geopolitical tensions, and worries about the global economy’s growth prospects, Hershey shares are up more than 10% year-to-date.

It is a sign of a trader’s confidence in the defensive nature of investing in Hershey Co.’s business, which, as reflected in share price performance, has held up very well amid heightened inflationary pressures and escalating recession fears.

About The Hershey Company

The Hershey Company manufactures and sells confectionery and cupboard items in the U.S. and abroad. The company operates in three segments:

• North American confectionery is the company’s largest segment, accounting for 83% of total consolidated sales in the first quarter of 2022. Revenue came from the sale of candy, mints and chewing gum, and chocolate to-go at retail locations.
• The North America Salty Snacks segment accounted for 8.5% of total consolidated sales.
• The third segment contributing to the company’s total consolidated sales is International, accounting for 8.4% in the first quarter of 2022.

The Hershey Company’s headquarters are located in Hershey, Pennsylvania.

A Resilient Business

As you can see from the company description just below, HSY sells products that people will buy regardless of the state of the economy.

When, for some reason, the economic situation is not conducive to consumption, people typically reduce spending on non-essential items (such as discretionary spending) but not on food, including chocolate, sweets and snacks.

Hershey’s products fill the need for tasty things, whose hardly elastic demand shows that consumption does not decrease, even with rising prices.

Now let’s take a look at how things have been going lately and analyze the key trends from year-to-year.

Financial Results for the First Quarter of 2022

Strong demand for Hershey’s confectionery combined with rising sales of Jolly Rancher and Twizzlers products drove revenue for the first quarter of 2022 to $2.67 billion, up more than 16% year-over-year.

Hershey’s North America Confectionery segment increased almost 12% year-over-year to $2.22 billion. Hershey’s North America Salty Snacks segment increased by 86.2% year-over-year to $226.1 million. Meanwhile, HSY’s International segment increased by nearly 18% year-over-year to $223.1 million.

Total revenue was better than analysts’ median forecast of $2.49 billion.

This revenue growth result gave the company the power to report earnings of $2.53 per share (up 32% year-over-year), beating analysts’ median estimate by $0.43.

Regarding its dividend, on April 28, the board of directors of The Hershey Company announced that the firm would pay a quarterly cash dividend of $0.901 per common share, and a quarterly cash dividend of $0.819 per Class B share, on June 15.

The company has paid 369 consecutive dividends on its common stock and 150 consecutive dividends on its Class B common stock.

Future Prospects

The expected improvement in Hershey’s confectionery business, coupled with a continued market penetration of Dot’s products (a family of snack foods) in the domestic salty snack retail market, puts the company in a solid position to capitalize on Confectionery & Snacks growth for the next five years.

In terms of revenue, Statista estimates that the confectionery & snacks segment (worth $1.3 trillion in 2022) will grow by 2.5% each year from 2020 to 2027.

Guidance

Looking ahead to the end of 2022, the company expects net sales to grow 10% to 12% from last year’s sales of $8.97 billion. The company also forecasts non-GAAP earnings per share of $7.91 to $8.05, up 10% to 12% from $7.19 in 2021.

The Financial Condition

As of March 31, 2022, the balance sheet had $338 million while total debt amounted to $5.31 billion. This mismatch could raise concerns about the financial balance of The Hershey Co.

Wall Street’s Take

In the past three months, fourteen Wall Street analysts have issued a 12-month price target for HSY. The stock has a Moderate Buy consensus rating based on five Buys, eight Holds, and one Sell rating.

The average Hershey price target is $222.69, implying a 4.74% upside potential.

Valuation

Shares are changing hands at $213.45 as of the writing of this article for a market cap of $43.89 billion and a 52-week range of $167.80 to $231.60.

After falling about 6.5% from its May 16 peak, the stock price is about 2.5% below the 50-day moving average of $218.97, leaving this loyal dividend-payer slightly cheaper than it was just a few weeks ago.

As of this writing, the stock offers a dividend yield of 1.74%, beating the benchmark S&P 500 index’s yield of 1.57%.

Conclusion

Hershey headed in the right direction, fighting an uphill battle against the current market turmoil.

Investors may want to stay in defensive consumer stocks that, like The Hershey Co., offer more than adequate protection from myriad headwinds. Consumers will always love their sweets and treats, even if inflation takes a stronger grip.

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