Hershey shares near 4-year lows amid tight cocoa supply conditions 📉

Shares of one of the most recognizable US confectionary chocolate producers, Hershey (HRSHY.US) reach 52-week lows as global sentiments shifted amid lower consumer spending, and rising cocoa prices which are pressuring the company margins, being its biggest part of its producing costs. Does the Hershey have very limited potential of putting that costs to consumer? 

• Hershey rejected Mondelez bid offer, for being too small: 'under the Board estimates'. In 27 December, TD Cowen raised its estimated Hershey “take out price” of a potential acquisition from Mondelez to $255 per share, almost 60% premium from current Hershey shares price at $157.
• In the Q3 2024 (ended Sept. 29), sales fell 1.4% with adj. earnings per share (EPS) 10% lower year over year. Both came in below analysts estimates. As for now, the company projects cocoa prices to stabilize in 2025.
• Despite that, Bloomberg News informed a few days ago, that Hershey has requested permission from the Commodity Futures Trading Commission (CFTC) to buy a huge amount of cocoa at 90000 MT from the ICE inventories (more than the exchange could offer), amid cocoa industry shortage. This information pressured the stock, as Wall Street is worried about cocoa market influence on future Hershey production costs.

The truth is that the company has to operate in 2025, whatever the cocoa costs will be. However, in the long term, current cocoa market shortage conditions will be hard to maintain, which may give a Hershey more strategic fuel, despite some tactical weakness. BofA analysts have $180 price target for Hershey, with neutral rating; Citi lowered the recommendation to $159 per share. Hershey plans to raise product prices by 3 to 4% in 2025.

Historically, Hershey's forward PE ratio fthe lastlast 10 years was 27; now it's 19. The company still has much higher net margins that its peers, and even much higher than Coca-Cola. Also current PE Ratio at 17 level is lower than other consumer discretionary peers such as PepsiCo or even Mondelez. Source: XTB REserach, Bloomberg Finance L.P.

Given still higher than major peers, double-digit Hershey's net margins (despite lower chocolate consumption and cocoa costs), with lower  both Forward PE and PE Ratio, we can assume that the company may be relatively undervalued vs industry peers. Source: XTB Research, Bloomberg Finance L.P.

Hershey (HSY.US)  chart on D1 interval

Hershey shares drop almost 20% below EMA200, amid huge sell-off which started in June 2023. 

Source: xStation5