Why Hershey Co. Isn't Such a Sweet Selection

Does this analyst make a good case? Or is it just more noise from Wall Street?

Brian D. Pacampara, CFA
Brian D. Pacampara, CFA
Apr 9, 2014 at 12:00PM
Consumer Goods

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Hershey Co. (NYSE:HSY) sank 2% today after Goldman Sachs downgraded the chocolate-products specialist from neutral to sell.

So what: Along with the downgrade, analyst Jason English planted a price target of $90 on the stock, representing about 12% worth of downside to yesterday's close. While momentum traders might be attracted to Hershey's price strength during the past year, English's call could reflect a growing sense on Wall Street that its valuation is becoming a bit stretched.

Now what: According to Goldman, Hershey's risk/reward trade-off isn't too appealing at this point. "HSY has been on a multi-year beat-and-raise cycle on the back of above-trend North American chocolate gains, productivity realization and cost relief," noted English. "We believe this cycle is ending and see risk to expectations and an inflated valuation. ... We lower our FY14-FY16 EPS estimates by 3-6% to reflect lower sales and margin expectations." When you couple that downbeat view with Hershey's 25-plus forward P/E, it's tough to disagree with Goldman's bearishness.