While most stocks trading at absurdly cheap valuations do so for very legitimate reasons, there remain many cases where this deep discount from the market may be short-sighted. Two businesses that currently epitomize this concept are online petcare retailer Chewy (CHWY +0.42%) and beloved confectioner The Hershey Company (HSY 0.61%).
However, after a 60% rise in its share price over just the last month, Chewy probably doesn't scream "absurdly cheap" to investors any more. Yet I believe this could prove to be the starting line for a much larger, long-term run for Chewy's share price.
Meanwhile, with Hershey trading at a once-in-a-decade low valuation, it may seem like the brand is facing an existential crisis. But this couldn't be further from the truth as the company continues to navigate current challenges with aplomb.
Ultimately, while their prices may be moving in different directions over the short term, here's why both stocks could prove to be absurdly cheap to investors willing to invest $500 and hold for decades.
NYSE: CHWY
Key Data Points
Chewy's rising profitability
When considering Chewy as an investment, it is crucial for investors to zoom out on the company's stock-chart time line. While the leading online petcare retailer is indeed up 60% in just the past month, it remains nearly 80% below its all-time highs set in 2021. Compared to this peak and subsequent decline, Chewy's recent run is barely noticeable on its five-year chart.
Most importantly, however, regardless of where its share price has gone in recent years, Chewy's actual business is more operationally sound than ever. Recording a gross margin of 30% and a net-profit margin of 2.3% in the first quarter of 2024, the company continued its streak of steadily improving profitability.
CHWY Gross Profit and Net-Profit Margin (Quarterly) data by YCharts.
Leading this rise has been Chewy's streamlining across its logistical network. Now capable of serving 80% of the contiguous United States in one day and 100% of it in two days, the company can reap the rewards of spending years building up its distribution network across the country.
Thanks to these investments, Chewy's average miles traveled per package declined by 28% between the third quarters of 2022 and 2023. Best yet for investors, with the company's autoship sales now equal to 78% of Chewy's total revenue -- a figure that has grown from 66% in 2018 -- these logistical efficiencies could continue improving further.
With this massive installed base of scheduled and recurring purchases, the company is uniquely advantaged by knowing where roughly four-fifths of its sales need to go weeks ahead of time.
However, this streamlining is far from the only thing lifting Chewy's profitability higher. Intent on building out its higher-margin Chewy Health business, the company opened its first four veterinary care clinics in the last quarter.
These store openings set the stage for a higher-margin growth story for Chewy as it looks to disrupt a vet industry that is in turmoil due to significant private-equity purchases in the space. With pet owners and vets in agreement on their negative sentiment toward these private-equity shops, Chewy's No.1 customer-satisfaction rating from Forrester's could prove to be a major differentiator.
Meanwhile, the company is also launching full speed ahead into sponsored advertising, pet insurance (through partnerships with Lemonade and Trupanion), and private-label products -- all of which boast higher margins. Trading with a price-to-sales (P/S) ratio of just 1 compared to the S&P 500 index's average of 2.5, Chewy's potential to continue delivering higher profits over the coming decade looks reasonably priced today.
Image Source: Getty Images.
Hershey's once-in-a-decade valuation
Battling cocoa prices that have more than tripled over the last two years due to erratic rainfall in West and Central Africa, The Hershey Company has seen its share price drop 34% from its all-time highs.
Despite this rapid rise in the price of the company's most essential ingredient, Hershey has continued to increase its sales and earnings-per-share (EPS) ever higher over the last few years -- as the company has traditionally done for decades.
HSY Revenue and Diluted EPS (TTM) data by YCharts.
However, with management expecting flat EPS growth in 2024, the market has taken a wait-and-see approach toward Hershey's stock, leaving it to trade at just 18 times earnings -- what looks like a once-in-a-decade valuation.
HSY PE Ratio and Dividend Yield data by YCharts.
Compared to the S&P 500's average price-to-earnings (P/E) ratio of 25, this low valuation looks like a deep discount for a robust blue chip business such as Hershey. Similarly, the company's 2.8% dividend yield is at its highest level in the last decade, which is equal to the mark it set in 2018.
While the company won't be mistaken for a high-growth stock anymore, its recent acquisitions of Skinny Pop popcorn and Dot's Pretzels for a combined $2.8 billion seem to be paying dividends so far. Generating a combined $860 million in sales during 2023, the two salty snack brands are already Hershey's sixth- and ninth-highest-selling products.
NYSE: HSY
Key Data Points
The cherry on top for investors? In a recent survey by Statista, Hershey's, Reese's, and Kit Kat (all Hershey labels) were the first, second, and fourth most-consumed chocolate brands by Americans in 2023. Buoyed by this long-standing and somewhat unshakable popularity, Hershey looks primed to raise its dividend not just for its 15th consecutive year but potentially for decades to come.
