Hershey Company Bubbles To New High

Hershey Company Rises On Price Increases 

Hershey Company (NYSE: HSY) is no bad investment but it is one of the higher-valued stocks in the consumer staples group. The stock trades at roughly 27X its forward earnings but you do get a lot for what you pay for. The Hershey Company is one of the best-established brands in the food industry at large, not to mention its place in the candy business, and it is a well-operated business on top of that. Throw in a safe 1.85% dividend yield and the picture becomes much clearer but there is a fly in the mix in the form of inflation. The company is keeping up with inflation but forecasts most of its growth in 2022 is going to be due to price increases. Price increases are meant to offset inflation and are doing their job, the problem we see is that price increases may cut into overall business activity as we have already seen in the retail sales data. 

Hershey Exceeds Consensus, Guides Strong For 2022 

Hershey had a good quarter and grew its revenue by 6.4%. The net $2.33 billion also beat the consensus estimate by 260 basis points but the company estimates 6.1% of the gain is due to “price realization”. Price realization is higher prices for products sold which leaves volume growth at a mere 0.3% and there is the addition of acquisitions to consider. Acquisitions account for 220 basis points of the growth and are offset in part by a negative headwind from FX. On an organic basis, sales are up only 4.0% which means volume is really down and being offset by price increases that are expected to continue in 2022. 

Moving down the report, the company logged a 50 basis point contraction in the adjusted gross margin despite the aggressive price increases. This left AGM at 43.5% which is slightly better than expected. On the bottom line, the $1.69 in adjusted EPS is up 13.45% from last year and beat the consensus by $0.07.

The company is expecting to increase prices again this year and is guiding the market higher because of it. The new guidance is for revenue growth of 8% to 10% compared to the 5.4% forecast by the Marketbeat.com consensus estimate. The only good news is that margin expansion is expected and will drive earnings growth to 9% to 11%. This puts adjusted EPS near $7.83 compared to the $7.60 consensus but there is another sticking point. Margin expansion is due to expected reductions in ad spending which might negatively impact results.

“The company expects net sales growth to be driven primarily by list price increases across all segments.  Pricing is anticipated to partially offset investments in labor, along with higher logistics costs and raw material inflation.  Sales growth and increased media efficiencies are expected to more than offset gross margin pressures to drive adjusted earnings per share growth.”

The Technical Outlook: Hershey Company Breaks Out To New High

The Hershey Company stock broke out to a new high in the wake of the Q4 earnings results and are heading higher by the look of the chart. The indicators are rolling into a bullish signal as well but MACD has yet to make its crossover. There is a risk that the upward momentum is without much force due to the weak nature of the MACD. If this is true we would expect to see signs of resistance begin to appear almost immediately. If not, this stock may consolidate at the current levels and then move higher as quality-seeking income investors move in, but we prefer other, lower-valued, and higher-yielding consumer staples.