It's been a volatile ride for The Hershey Company (HSY +1.96%) and its investors in recent times. The stock is trading modestly higher this year but still down more than 25% from its record high in early 2023. A string of disappointing quarterly results for the confectionery giant amid shifting consumer spending trends and lingering inflationary cost pressures have kept shares under pressure.
Despite the sour headlines, there are plenty of reasons for investors to stay bullish on Hershey in what remains a sweet long-term outlook. Let's discuss where the stock might be five years from now and whether it's a good buy now.
NYSE: HSY
Key Data Points
A sweet tooth leader
Hershey is globally recognized for its namesake chocolate, which has a history of more than 125 years. Most people may not know that the company also controls a broader portfolio of several other iconic candy brands such as Reese's, KitKat, Jolly Rancher, and Twizzlers.
In recent years, Hershey has expanded its reach in salty snacks with SkinnyPop Popcorn and Dot's Pretzels, both representing important growth drivers. The brand name lineup and the company's category leadership highlight the attraction of the stock as a potential investment.
Image source: Hershey Company.
A disappointing start to 2024 for Hershey
That said, Hershey hasn't been immune to the challenging macroeconomic backdrop. Management is citing a dynamic of consumers pulling back on discretionary purchases. In the second quarter, sales dropped by 16.7% while earnings per share (EPS) of $1.27 was 38% lower compared to Q2 2023.
The headline metrics are concerning, but the context here is important. Hershey's implementation of a new enterprise software system alongside a planned inventory adjustment was responsible for most of the decline. Balancing the weakness in the confectionery categories, a strong point was the North American salty snacks group, which posted a solid 9% volume increase from Q2 2023 including the Dot's Homestyle Pretzel brand as a top performer.
The understanding is that seasonal shipments have been pushed out into Q3 with the expectation that sales will normalize into the second half of the year. Hershey is guiding for 2024 net sales growth around 2% while forecasting EPS to be "down slightly" from the $9.59 result in 2023. Overall, it's not quite the start to the year that Hershey investors would have hoped to see, but the company's full-year outlook offers a sense that conditions are stable.
A positive fundamental outlook
Beyond the near-term quarterly noise, the company has many levers to adapt to changing market conditions, such as diverting resources to different parts of the portfolio or managing pricing in support of margins. There is also some optimism for the international market segment, which has contributed just 18% of total sales this year but offers a major opportunity to expand by entering new markets.
Investors can also look forward to Hershey continuing its long tradition as a dividend grower. Except for 2009, the company has hiked its quarterly dividend rate every year since 1988, including the 15% increase to the current $1.37 per share amount earlier this year yielding 2.7%. The combination of steady growth and underlying profitability adds a layer of quality to Hershey's stock.
In terms of valuation, Hershey's stock is trading at a forward price-to-earnings ratio of 21. Notably, this level is at a discount from the stock's five-year average for the multiple closer to 26, suggesting shares are undervalued and investors could be getting a bargain -- assuming the company can get back on track with executing its growth strategy. A couple of quarters with rebounding sales outperforming expectations could be a catalyst for the earnings premium to converge higher as a tailwind for the stock.
HSY PE Ratio (Forward) data by YCharts
Where will Hershey be in 2029?
I'm bullish on Hershey's stock. Management maintains a target to generate adjusted annual EPS growth between 6% and 8% per year over the long run. In my view, the stock should climb by at least that level with some upside through a valuation expansion as operating and financial momentum improves.
By 2029, I predict the stock price could reach $300, implying approximately 50% upside from the current level with incremental shareholder returns from the dividend income over the period.
