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Stock Analyst Update

Why Investors Should Stock Up on Hershey

The wide-moat firm's efforts to leverage its scale and reach on its home turf to further entrench relationships with its retail partners are bearing fruit.

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We walked away from wide-moat  Hershey's (HSY) investor day, held Aug. 28 in Hershey, Pennsylvania, with renewed conviction that the firm’s efforts to leverage its scale and reach on its home turf to further entrench relationships with its retail partners are bearing fruit. As such, we aren’t altering our $116 fair value estimate, which is based on 3%-4% annual sales growth and a more than 300-basis-point increase in operating margins to nearly 24% by fiscal 2027. With the shares trading at a 15% discount to our valuation, we think investors should look to stock up.

Hershey’s dominance in the U.S. confectionery space is undeniable; the firm holds about a 45% share of the chocolate aisle, versus just a 1% share for private label. When combined with the resources Hershey invests behind its brands (we forecast research, development, and marketing to average 8% of sales or $700 million annually over the next decade), we think the firm remains a valuable partner to retailers. But questions have surfaced as to whether these relationships will hold the same clout online, particularly in snacking, where impulse purchases are commonplace and small, niche startups are also vying for share. Chief digital commerce officer Doug Straton, who joined the firm about 10 months ago from Unilever, suggested that Hershey is working with its retail partners to meld its online and offline strategies, an essential undertaking, given that three fourths of the time when consumers initiate a search, it occurs on retailer websites. Evidence of the success of these efforts is in Hershey placing second (behind General Mills) in Gartner’s L2 Digital IQ Index among its U.S. food peers, illustrating that the firm understands the necessity of investing to build out this area of its business. Overall, we think these efforts support our contention that Hershey is poised to drive accelerating sales growth over time and sustain its solid competitive edge at home.

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