On Monday, Morgan Stanley (NYSE:MS) issued a downgrade for The Hershey Company (NYSE:HSY) stock, shifting its rating from Equalweight to Underweight. This adjustment comes with a revised price target set to $183 from the previous $191.
The firm's analyst highlighted a variety of concerns that could potentially obscure the confectionery giant's midterm earnings and growth prospects.
The downgrade was primarily influenced by Hershey's recent fourth-quarter earnings report and the subsequent guidance for 2024, which suggested a flat year-over-year earnings per share (EPS). Although the company has taken measures such as securing ingredient costs for the year ahead, enhancing productivity, and planning to boost innovation and promotions, Morgan Stanley remains cautious.
The analysts pointed to the low-quality nature of the fourth-quarter results and the challenging operating environment as reasons for concern.
A significant factor in the downgrade is the steep increase in cocoa prices, which have surged 25% since the firm's previous note and represent 18% of Hershey's cost of goods sold (COGS). This rise is expected to pressure the company's gross margins and EPS growth into 2025. Additionally, there appear to be fewer options for Hershey to mitigate the impact of higher cocoa costs on its margins.
The analyst also cited soft organic sales growth amidst intensifying competition and weaker demand in the confectionery and salty snacks segments. The difficulty in implementing price increases in this context adds to the challenges faced by Hershey. Furthermore, the long-term implications of the company's exposure to GLP-1 adoption were noted as a concern within the firm's coverage.
Despite Hershey's shares recovering 10% from their December lows, Morgan Stanley's analysis suggests that the current valuation, which is at a 21% premium to the Packaged Food group with a 20.4x next twelve months (NTM) P/E, does not favor potential investors. The expected cocoa inflation and the muted midterm EPS growth potential are likely to exert downward pressure on Hershey's stock valuation.
InvestingPro Insights
In light of Morgan Stanley's recent downgrade of The Hershey Company (NYSE:HSY), investors may benefit from considering additional insights from InvestingPro. Notably, Hershey has a history of financial reliability, having raised its dividend for 14 consecutive years and maintained dividend payments for 54 consecutive years, a testament to the company's commitment to shareholder returns. These are significant InvestingPro Tips, as consistent dividend growth can be an indicator of a company's financial health and management's confidence in future earnings.
From a valuation perspective, Hershey is currently trading at a high Price/Earnings (P/E) ratio of 21.58, with an adjusted P/E ratio for the last twelve months as of Q4 2023 at 20.72. This aligns with the concerns raised by Morgan Stanley regarding the company's premium valuation. Additionally, the Price/Book ratio as of Q4 2023 stands at 9.75, which suggests that the stock may be trading at a high multiple relative to its book value.
Investors should also note that Hershey's revenue growth over the last twelve months was 7.16%, with a gross profit margin of 44.75%, indicating a strong ability to convert sales into profit. However, with 12 analysts having revised their earnings downwards for the upcoming period, there may be caution around future growth prospects.
For those considering an investment in Hershey or seeking further analysis, there are more InvestingPro Tips available, which can offer deeper insights into the company's financial health and market position. To explore these additional tips, visit https://www.investing.com/pro/HSY and remember to use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. With the coupon code, investors can gain access to a comprehensive set of tools and data to make more informed investment decisions.
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