The Hershey Company: This Iconic Stock Looks Overvalued_老虎社区_美港股上老虎

The Hershey Company: This Iconic Stock Looks Overvalued

seekingalpha2023-08-31

Hershey's stock has underperformed the S&P 500 over the last year and is struggling.I believe the company relies on unsustainable price increases and has likely reached a saturation point in North ...

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进强VVvv
·2023-09-05
节日又回来了，快乐也回来了，快乐的日子怎可缺了甜蜜的点缀？继续看好好时！
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corporations don't always make good investments. Markets usually require investors to pay up for premium companies, and many well-known brands eventually reach a point of saturation. Often times, the valuation of some of even the best companies is too high to justify investing in these stocks. One of the most well-known brands in the United States is the Hershey (NYSE:HSY) company. This company owns the Hershey's brand, Reese's, Kit-Kat, Twizzlers, Milk Duds, York Peppermint Patties, Whoppers, Rolos, Lilly's low-sugar chocolates, and IceBreakers brands. Data by YCharts Hershey's stock has offered investor total returns of 199.73% over the last decade. The S&P 500 has offered investors total returns of 220% during the same time period. Still, this iconic company has struggled over the last year. Data by YCharts Hershey's is down 4.34% over the last year, while the S&P 500 is up 9.97% during this same time period. Today, I am initiating a rating of sell for Hershey's stock. I think the company is relying on unsustainable price increases even while sales volume is slowing. Hershey's is also heavily reliant on North American markets where the company's brands have likely reached a saturation point, and the company's margins look unsustainable at current levels. The stock also looks overvalued using several metrics. Hershey's recent second quarter earnings reports showed how reliant the company is on what likely have been unsustainable price increases to drive earnings per share growth. The company recently reported earnings per share using GAAP of $1.98, and revenues of $2.49 billion. The chocolate maker beat earnings per share estimates by $.10, and missed on revenues by $9.68 million. Management reported that organic constant currency net sales increased by 5% year-over-year, and earnings per share rose by 11.7%. The company also raised guidance by saying the chocolate maker expects earnings to grow by 13-15% in 2023. The company's earnings report looked solid at face value, but there were several warning signs that should be concerning to investors. An excerpt from Hershey's second quarter earnings report (prnewswire) Hershey's relied heavily on price increases to grow revenues in the company's core North American chocolate business, and management has been doing that for 2 years now. Sales volume in this segment fell by 3.6%, but price increases of 8.4% offset the slowing purchases of the company's products in this division. Sales volume was also negative in the North American salty snack division. While the company did see some marginal sales volume growth internationally, 90% of the company's revenues comes from North America, and barely over 10% of the company's revenues come from the salty snack division. Hershey's is still mostly a North American chocolate company, and has over 45% market share of the chocolate industry in North America. This core segment of the business appears to have reached a point of saturation in this key market. The company's current net margin of 16.48%, which is near a decade high, also seems unsustainable for multiple reasons. A chart of Hershey's net margins (Macrotrends) Hershey's is planning to spend between $800 billion to $850 billion, with a focus on expanding digital sales of the domestic chocolate business. The labor costs also are not likely to fall, with shortages in the job market continuing to be an issue nationwide. The company raised prices by 14% in 2022 alone, and management has increased prices 20% in the last 2 years combined. Cocoa and sugar prices are also both at very high levels right now, with cocoa prices recently hitting a 46-year-high, and sugar prices at near decade highs. This is also why Hershey's looks overvalued at current levels using multiple metrics. The company currently trades at 22.81x expected forward earnings, 4.39x forecasted forward sales, and 15.99x likely forward EBITDA. The industry average valuation is 18.47x expected forward earnings, 1.72x predicted forward sales, and 11.36x forward EBITDA. While Hershey's is trading below the company's average 5-year valuation, analysts are also expecting the Chocolate maker's earnings growth to slow significantly in coming years. Food companies such as General Mills (GIS) are trading at more a reasonable 15x expected forward earnings, even though analysts are forecasting similar mid-single digit growth for this other well-known company. A chart showing forecasts for Hershey's earnings (Seeking Alpha) Hershey's is expected to grow earnings at just 4-6% from 2024 to 2027, and even though the company's business model has proven to be recession resistant, the current yield of just 2% despite the payout ratio being nearly 50% suggests that this company will likely offer minimal income or total returns over the next several years. Hershey's has operating free cash flow of $2.26 billion, and levered free cash flow of $1.15 billion, but the company also has $5.28 billion in debt, so management won't likely be able to continue to borrow to increase the dividend at a double-digit rate as the chocolate maker did last year with rates higher now, in my opinion. Hershey's market share of 45% in the North American chocolate industry looks to be at a point of saturation. Still, the company could potentially beat analyst expectations moving forward if the company were to be able to grow the smaller salty snack business out, or if management could accelerate the company's still fairly minimal international earnings. Hershey's international sales are under $1 billion right now, and the company's salty snack division remains less than 15% of overall revenues at nearly $1.2 billion. This scenario doesn't seem likely, though.  Iconic companies don't always make good investments. Exxon Mobil (XOM) and General Electric (GE) are two more recent examples of companies that have consistently underperformed the broader indexes for years. While Hershey's has achieved an impressive 45% market share in the North American Chocolate market, there isn't strong room for growth in this key region, and the company can't keep raising prices by 20% every 2 years in my view. While Hershey's has been one of the better performing stocks in the market for several decades, I believe this company's best days are likely in the past.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[{"id":216640502132976,"gmtCreate":1693924110008,"gmtModify":1693924111785,"author":{"id":"4100146025993970","authorId":"4100146025993970","name":"进强VVvv","avatar":"https://static.tigerbbs.com/8904ac11360c90c6203d0e97d460a8df","vip":1,"crmLevel":4,"crmLevelSwitch":0},"htmlText":"节日又回来了，快乐也回来了，快乐的日子怎可缺了甜蜜的点缀？继续看好好时！","listText":"节日又回来了，快乐也回来了，快乐的日子怎可缺了甜蜜的点缀？继续看好好时！","text":"节日又回来了，快乐也回来了，快乐的日子怎可缺了甜蜜的点缀？继续看好好时！","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/216640502132976","repostId":2363859202,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}