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Stock Strategist

Hershey's Sweet Wide Moat Unwavering

Long-term investors should warm up to shares trading at a discount to our fair value estimate.

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 Hershey's (HSY) results--and ultimately its share price--have come under pressure, but the market's concerns surrounding lackluster performance in China and volume erosion on the confectioner's home turf are overblown. Given that it operates as a leading confectionery manufacturer, with 45% share of the U.S. chocolate space and a cost advantage, we think shares trade at an attractive discount to our $103 fair value estimate--a price/fair value ratio of 0.9 and a forward price/earnings multiple of 21 times. From our vantage point, investors looking to gain exposure to the packaged-food space should consider building a position in this wide-moat name.

We're holding the line on our $103 fair value estimate after incorporating recent results, which implies fiscal 2016 price/adjusted earnings of 24 times and enterprise value/adjusted EBITDA of 15 times. While the firm lowered its long-term sales (to 3%-5% growth from 5%-7%) and earnings target (to 6%-8% from 9%-11%) earlier this year, we'd held that its prior expectations were too sweet. Our long-term forecast, which remains in place, falls within Hershey's revised outlook.

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Erin Lash, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.