Confection conglomerate Hershey (HSY +0.66%) has found itself at the center of a new short report from none other than The Bear Cave. As I have covered before, The Bear Cave is not a traditional financial institution, but rather a one-person research forum run by a young Stanford University graduate, Edwin Dorsey, that publishes reports on the internet, primarily on Substack.
In a recent report, The Bear Cave highlighted an upstart confection business that Dorsey thinks could give Hershey a serious run for its money. In this article, I'll assess the rationale behind the short report and determine if Hershey stock is at risk. Let's dig in.
The downfall of an iconic brand?
Hershey is one of the most iconic global brands, boasting an array of chocolate, gum, and salty snack products in 60 countries. You may be familiar with some of its most popular items, including Kit Kat, Reese's Peanut Butter Cups, and of course, the Hershey Bar.
At the center of the Bear Cave's report is social media superstar Jimmy Donaldson, otherwise known as MrBeast. Donaldson is among the most popular personalities on YouTube with nearly 170 million followers on the platform and nearly 29 billion views. Oh, and that's just on his main page. He has several ancillary YouTube channels that also have millions of followers and views.
With such a large audience, it is safe to say that he understands a thing or two about marketing. Well, last year Donaldson announced that he had created his own line of snacks, dubbed Feastables. As of now, Feastables consists of cookies, gummies, and of course, chocolate bars. Consumers can find Feastables in a number of retail locations, including Walmart, Albertsons, and 7-Eleven, among others. Moreover, the social media darling recently brought Feastables over the pond to the U.K.
With all of this momentum, The Bear Cave believes that Hershey's business is about to feel some competition.
Image Source: Getty Images
Should investors be concerned?
It's important to keep in mind that this is not the first time a YouTuber has tried to expand into consumer goods, and it certainly won't be the last.
We should also take a look at the business Hershey has built over the past century. For the full year ended Dec. 31, 2022, Hershey reported total revenue of $10.4 billion, which represented an increase of 16% year over year. Further, the company guided for its top line to grow between 6% and 8% in 2023.
When Hershey reported results for Q1 2023, ended April 2, investors learned that sales came in at $2.9 billion, an increase of 12% year over year. Moreover, management guided toward the high end of its prior estimates, believing 8% annual growth is achievable. Perhaps even more encouraging is that Hershey grew across all geographic segments, with its overseas business increasing 19% year over year during Q1.
On top of all of this, investors need to keep in mind that Hershey is far more than a chocolate business. During Q1, the company's North America Salty Snacks segment grew 19.4% year over year, with products including popcorn and pretzels leading the charge.
Expanding across geographic regions and product segments has helped Hershey generate strong, consistent cash flow and profits. For the quarter ended April 2, Hershey's net income grew 10% year over year to $587 million, and its balance sheet carried a whopping $460 million of cash and equivalents. Despite MrBeast's audience and popularity, Hershey is clearly well-capitalized to take on its competition.
Is the stock a good value?
NYSE: HSY
Key Data Points
Hershey's reach spans across dozens of countries, and its portfolio is comprised of products far beyond chocolate bars. Its primary competitors are other large food conglomerates like Mondelez International, Nestle, Kellogg, or the privately held Mars company. One could argue that MrBeast entering the space will be a good thing overall, as it further increases competition.
While MrBeast's entry into the confections arena may be intriguing, Hershey's brand has been a staple of the candy world for over a century, and it is highly unlikely that Feastables will acquire meaningful market share away from Hershey anytime soon.
Currently, Hershey shares trade at a forward price-to-earnings (P/E) ratio of 26. By contrast, Mondelez trades at 23, while Nestle and Kellogg trade for about 21 and 17 times forward earnings, respectively.
Should there be a pullback in the stock, long-term investors should take advantage. Considering the company's robust top-line growth, strong profitability, and its current guidance, Hershey stock could still be viewed as a good value investment despite trading at a premium to its peers.
