U.S. Markets closed

Hershey Shares May Be too Tasty for Their Own Good

By Charlie Blaine

Investing.com - Iconic chocolate maker Hershey's shares have been pretty sweet of late, reaching new highs recently. But is the stock now priced for perfection?

Certainly Goldman Sachs thinks so, saying on March 29 that the shares were vulnerable to a 20% pullback.

Hershey (NYSE:HSY) shares duly rose nearly $3 to a 52-week high of $116.73 on Tuesday before drifting back. They're off 0.5% today and 0.8% from that Tuesday peak. But they're still up 30% from early May.

But don't just listen to Goldman. There are good reasons to think the stock has all the good news priced in.

The consensus target price from analysts polled by Investing.com is $103.67, down more than 10% from current levels. Of 16 analysts who cover the stock, only three rate it a buy. Twelve are neutral.

The company is struggling with sales growth. North American sales overall grew 4.3% in the fourth quarter, but most of that was due to sales from new acquisitions. Back that out and core Hershey sales fell around 3%. About 89% of Hershey's $7.8 billion in sales in 2018 came from North America.

Competition is getting tougher, especially from arch rival M&M Mars.

Distribution costs are rising, thanks in part to higher fuel prices.

But Hershey was a great counter-play in the fourth quarter when the stock market was tanking, rising 5.1% when the major averages tumbled 20% or more. And Hershey is up 8% this year.

If Hershey does fall, it will not be because sales are growing slowly. It's a product where sales rise with population and are basically stable. The controlling shareholder, the Milton Hershey School Trust, controls 80% of the voting shares. The dividend is stable. Its net profit margin is north of 15%.

And it has fantastic brand recognition. There are Hershey Bars, Reese's Cups, Reese's Pieces (the candy preferred by E.T.), Hershey's Cocoa and Jolly Rancher hard candies. It does business in 70 countries.

If Hershey falls, the reason will be simply the price is high and has gone up a lot.

Also, growth stocks, the traditional drivers of market gains, have reasserted themselves.

Apple (NASDAQ:AAPL), for example, is up 27% this year after falling 30% in the fourth quarter and 6.8% for all of 2018. Cisco Systems (NASDAQ:CSCO) is up 28.8% and Netflix (NASDAQ:NFLX) is up more than 35%.

But if the market stumbles, Hershey will become tempting again.

Related Articles

Foxconn's Gou says will follow order of sea goddess to run for Taiwan presidency

Aptiv opens autonomous mobility center in China

Asia relieved as China data point to recovery