Hershey (HSY -0.10%) shareholders sat out of 2020's stock market rally on concerns that the candy and snack giant would struggle with weak selling conditions for the foreseeable future.
It's true that its growth results trailed peers like PepsiCo (PEP -0.06%), which also delivers investors a bigger dividend and a bigger portfolio of staple snack and drink brands. But Hershey has an opportunity to change that sour investing narrative when it closes the books on 2020 in just a few days while issuing its first official outlook for the new fiscal year. Let's take a closer look at what's expected in that announcement, set for Feb. 4.
In mid-2020, Hershey predicted that sales gains would accelerate in the second half of the year, and that prediction bore out last quarter. Organic sales rose 4% in the third quarter compared to a 4% drop in the prior quarter. The growth beat the forecast of most investors, who were looking for just a 1% uptick.
Shareholders are hoping that the positive momentum continued into the holiday snacking and baking season in the form of another solid sales boost. Looking behind that headline figure, Hershey needs to show that it is gaining market share in core niches like sweets, gums, and its salty snack additions like Pirate Brands. The confectioner is also aiming for more-balanced growth, which would show up in faster volume gains to go along with its higher pricing.
The outlook is clearer when it comes to earnings, which should jump this quarter. Hershey's profitability is getting a boost from the combination of cost cuts and higher candy prices, which last quarter led to a 16% spike in adjusted earnings. Cash flow has been similarly strong, rising to $1.1 billion through the first nine months of the year from $1 billion a year earlier.
Most investors are banking on another strong profit showing this quarter, with earnings rising to $1.43 per share from $1.28 a year ago.
What about 2021?
Assuming Hershey lands close to management's targets for late 2020, most investors' attention will be on the outlook that CEO Michele Buck and her team issue for the next year.
PepsiCo is on pace to boost its organic sales by about 5% this year, or roughly the same blockbuster result it achieved in 2019. Hershey, in contrast, is set for near flat results in 2020.
The good news is Hershey is boosting margins while Pepsi's are sitting still. But the stock's performance from here will depend on whether the confectioner can get sales volumes rising at a faster pace without sacrificing operating margin.
That's a sweet combination that would translate into soaring profits in 2021, which investors could pair with dividend income to get good returns from the stock. But until Hershey can demonstrate that it is walking this better operating path, you might want to keep it on your watch list or choose to invest in better-performing businesses like PepsiCo.