Shares of The Hershey Company (HSY 1.85%) are in a deep downturn, off over 40% from their 2023 highs. The confection giant is in its own personal bear market. Given the nature of the problems Hershey faces, the bad news that led to this decline isn't likely to let up anytime soon.
Yet, this food maker's share price drop is still a buying opportunity for growth investors. Here's why.
What does Hershey do?
Hershey is a consumer staples company. Within that broad sector description, it is a food maker. And within that, it is a snack maker. The company's biggest business is confections, dominated by its chocolate products. That includes industry leading brands like Hershey and Reese's. It is this business that is the problem right now.
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Generally speaking, consumer staples companies make products that are bought regularly -- regardless of the economic environment. Chocolate isn't a necessity, but it is an affordable indulgence that consumers love. So while recessions are a problem to consider, Hershey tends to be just as resilient a business as other food makers.
In fact, demand isn't expected to be a problem in 2025. Hershey continues to guide for a sales advance of "at least" 2% for the full year. And yet adjusted earnings are expected to drop around 35% or so. What's going on is that the price of cocoa -- the key chocolate ingredient -- has soared and is crimping the company's margins. Cocoa's price rise is simply too large to pass on to consumers so Hershey has to eat it, at least over the near term.
This is an opportunity for long-term growth investors
The interesting thing about Hershey as a company is that The Hershey Trust, a non-profit entity, has voting control of the company. The Hershey Trust uses the dividends it collects from Hershey (the company) to fund its philanthropic efforts. It takes a long-term view even when Wall Street is caught up in short-term problems, like the rise in cocoa prices.
High commodity prices tend to resolve over time because they bring new investment. Cocoa comes from trees, so the resolution process may be a long one, but eventually this issue will pass. And even if cocoa prices remain elevated, Hershey will cut costs and slowly raise prices to restore its margins. The Hershey Trust isn't likely to push management to do anything rash.
In fact, Hershey is operating just like it has for years. And that notably includes buying new brands to diversify its business. Despite the share price downturn, Hershey has inked deals to buy Sour Strips in the non-chocolate confection space and LesserEvil in the salty snacks space. These are two areas in which the company is looking to expand its business reach.
Simply put, management isn't running around worried about a five-alarm fire because Wall Street has a negative view of the business. Hershey is still investing for the long term, at least partly because it doesn't have to answer to Wall Street, it has to answer to The Hershey Trust.
Hershey: A growth and income opportunity for long-term investors
Hershey has a long history of growth, and demand for its core products remains solid. Management continues to invest for the future despite the cocoa headwinds it faces. Given the price decline, this still-growing food maker looks like it is on sale today. And the best part is that the price drop has pushed the dividend yield up to a historically high 3.5%. So not only is this downturn an opportunity for growth investors, but it is also an opportunity for income investors.
