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September 01, 2020 10:18am
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1 Chocolate Stock That Doesn't Stop for the Holidays

Leading chocolate manufacturer Hershey’s (HSY) shares have gained more than 14% over the past year, compared to the broader S&P 500 index’s 18% decline. The company reported impressive third-quarter results and raised its full-year financial outlook, reflecting higher-than-anticipated consumer demand and favorable price elasticities across its segments. Given HSY’s strong momentum, robust profitability, and reliable dividend payments, the stock should perform reasonably well throughout the year. Read on…

Last year, the stock market witnessed significant volatility due to record-high inflation, the Fed’s hawkish stance, geopolitical instability owing to the Russia-Ukraine war, and an economic slowdown. As a result, the broader S&P 500 index has declined more than 18% over the past year.

However, amid the market turmoil, consumer staples stocks, such as The Hershey Company (HSY), do well as they face relatively inelastic demand. Shares of HSY have gained 14.6% over the past year to close the last trading session at $223.27. The stock has gained 2.3% over the past six months.

HSY reported better-than-expected third-quarter 2022 financial results. “Third quarter results came in ahead of our expectations, as our increased brand investments and improved supply chain helped support resilient consumer demand and drove category growth across all business segments,” said Michele Buck, HSY’s President, and CEO.

“Marketplace share and gross margin trends improved versus the second quarter, and we have strong momentum exiting the year,” Michele added. Given the company’s strong performance to date and visibility into the fourth quarter, it raised its full-year financial outlook. The company increased its sales growth guidance to 14%-15% from 12%-14%. Also, it increased its adjusted EPS growth outlook from 12%-14% to 14%-15%.

Furthermore, the company has raised its dividend for 13 consecutive years. Its dividend payouts have increased at a 9% CAGR over the past three years and an 8.7% CAGR over the past five years. Its current dividend yield is 1.83%, and its four-year average yield is 1.99%.

Here is what could shape HSY’s performance in the near term:

Robust Financials

For the fiscal 2022 third quarter ended October 2, HSY’s North America Confectionery sales came in at $2.24 billion, up 10.4% year-over-year. Its international sales increased 15.4% from the year-ago value to $217.58 million. Moreover, its total sales grew 15.6% year-over-year to $2.73 billion, while its gross profit came in at $1.11 billion, a 4.4% increase year-over-year.

In addition, the company’s non-GAAP net income came in at $447.06 million, up 2.8% year-over-year, while its non-GAAP EPS increased 3.3% from the prior year’s period to $2.17.

Favorable Analyst Estimates

Analysts expect HSY’s revenue for the fiscal year (ending December 2022) to come in at $10.35 billion, indicating an increase of 15.3% year-over-year. The consensus EPS estimate of $8.27 for the ongoing year indicates a 15% year-over-year increase. Also, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.

Furthermore, the company’s revenue and EPS for the next fiscal year are expected to grow 6.2% and 8% from the previous year to $10.99 billion and $8.93, respectively.

High Profitability

HSY’s trailing-12-month gross profit margin of 43.27% is 37.9% higher than the industry average of 31.37%. Its trailing-12-month EBITDA margin of 25.32% is 118.4% higher than the 11.59% industry average. Likewise, the stock’s trailing-12-month net income margin of 15.69% compares to the industry average of 4.16%.

Moreover, HSY’s trailing-12-month ROCE, ROTC, and ROTA of 56.46%, 17.65%, and 14.62%, compare with the industry averages of 10.59%, 6.17%, and 3.73%, respectively.

POWR Ratings Reflect Promising Outlook

HSY has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. HSY has a B grade for Quality, consistent with its higher-than-industry profitability metrics.

In the 82-stock Food Makers industry, HSY is ranked #28. The industry is rated B.

Click here for the additional POWR Ratings for HSY (Growth, Value, Momentum, Stability, and Sentiment). View all the top stocks in the Food Makers industry here.

Bottom Line

HSY delivered better-than-expected third-quarter results driven by increased brand investments, sustained consumer demand, and an improved supply chain. The company further raised its net sales growth and EPS outlook, reflecting higher-than-anticipated consumer demand and favorable price elasticities across its business segments.

Moreover, analysts seem bullish about the company’s growth prospects, expecting its EPS to grow 10.5% per annum over the next five years. HSY is trading above its 50-day and 200-day moving averages of $232.14 and $223.63, indicating an uptrend. Given its high profitability and attractive dividend payment record, we think this HSY could be an ideal buy now.

How Does The Hershey Company (HSY) Stack up Against Its Peers?

While HSY has an overall POWR Rating of B, one might consider looking at its industry peers, Pilgrim’s Pride Corporation (PPC) and Lifeway Foods, Inc. (LWAY), which have an overall A (Strong Buy) rating.

HSY shares were unchanged in premarket trading Thursday. Year-to-date, HSY has declined -3.58%, versus a 0.35% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.


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