Hershey's Sweet Wide Moat Unwavering
Long-term investors should warm up to shares trading at a discount to our fair value estimate.
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.
Erin Lash, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.