Hershey (NYSE:HSY) controls many of the candy industry's most iconic brands. There's the namesake Hershey's and Hershey's Kisses treats in addition to Reese's, Twizzlers, and Jolly Rancher products, which sit at the top of up its 80-brand portfolio of global powerhouse sweets.

The combination of sugar and branding is a powerful one, which is why Hershey has been in business for well over a century and is likely to be selling many more chocolates for decades to come.

Yet that bright business outlook doesn't make the stock a good long-term investment right now. In fact, there are some good reasons investors might want to pass on buying shares today.

Hershey stock is expensive

First, investors have to be willing to pay a premium for this stock right now, both in comparison to rivals and on a historical basis. Shares are valued at a steep 24 times expected earnings, compared to 22 or less for peers such as General Mills (NYSE:GIS), Mondelez (NASDAQ:MDLZ) or J.M. Smucker (NYSE:SJM).



General Mills



Market capitalization

$23 billion

$43 billion

$71 billion

$18 billion

Profit margin











3.3 times

2.6 times

2.6 times

2.3 times

Data sources: Company financial filings and S&P Global Market Intelligence.

The story is the same when you look at revenue, where Hershey's valuation of 3.3 times sales trounces the 2.6 times ratio Mondelez and General Mills are both fetching right now. Even Smucker, which is enjoying surging profitability, can be bought at a much cheaper 2.3 times revenue.

Bitter operating results

The premium might be justified by improving operating trends, but that's not what's happening with Hershey. Its last complete fiscal year produced zero sales growth and a sharp decline in net income as snacking behavior shifted away from non-seasonal candies. Hershey maintained its dominant market position, but market share ticked lower for the first time since 2008.

Image source: Hershey.

2016 hasn't been off to a great start, either. Sales fell by 4% in Q1 after adjusting for exchange rate swings. Earnings declined to $1.09 per share from $1.14 per share in the year-ago period as profitability ticked down. 

Smucker, by contrast, posted a 5% sales jump in the same period, even as its net profit margin grew from 6% of sales to 9%.

Roadblocks to a buyout

Many investors appear to be betting on a buyout announcement or a bidding war breaking out to send Hershey shares higher. After all, the stock is still valued above the acquisition price that Mondelez offered in late June even though Hershey's board of directors unanimously voted to reject the deal and described it as providing "no basis for further discussion."

Image source: Getty Images.

Sure, Mondelez seems keen on adding Hershey's candy strength to its global snack portfolio, so it could be putting together another offer at a higher buyout price. It's also possible a third party could jump in to stir the pot with its own competitive bid.

Hope for a quick buyout makes a shaky investing thesis under most conditions, but it's even more suspect in this case. Hershey made it clear last month that it sees the latest offer premium as a non-starter. Meanwhile, the company is controlled by a trust, not by common stock shareholders, which means any deal would have to meet its approval. The trust has a long history of blocking such mergers, including a 2002 attempt by Wm. Wrigley and a 2007 offer by Cadbury. 

Without an imminent buyout, Hershey remains an attractive business with decent long-term prospects, but one that's unlikely to generate big gains for shareholders from here.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.