Shares of The Hershey Company (NYSE: HSY) are down about 7% following the company's mixed earnings report on February 8. The confectioner missed slightly on the top line, with revenue of $2.66 billion missing analysts' estimates of $2.72 billion. However, the company beat on earnings, delivering an upside earnings per share (EPS) surprise of $2.02. Analysts were expecting $1.95 EPS.
What may be more concerning to investors in the short term is slowing growth. Both revenue and earnings were flat on a year-over-year (YOY) basis. That's why it's important for investors to understand the issues at play with HSY stock.
Hershey's is facing higher input costs
Even as a large-cap stock, Hershey's is particularly sensitive to increased commodity prices. The price of cocoa has increased 142% in the last 52 weeks. And in the company's question-and-answer session with analysts following the earnings release, management indicated that they're not expecting relief from surging cocoa prices in 2024.
As you would expect, higher cocoa prices are taking a bite out of Hershey's earnings. However, Hershey's chief executive officer (CEO) Michele Buck said on the company's conference call that the company won't hesitate to execute strategic price increases to help partially offset the rise in cocoa prices.
Said Buck, "...As you know we can't talk about future pricing, but I do want to be very clear that there's no change to our pricing strategy and our commitment to use pricing to cover inflation and to support the investments that we think are critical to drive the business."
Trying to get the pop back in salty snacks
While the company is best known for its signature chocolate products, Hershey's derives significant revenue from its salty snack business. And one of the most noteworthy brands for the company is Skinny Pop popcorn.
The company's sales of salty snacks were below expectations for the quarter, and Skinny Pop sales were a significant reason for that decline. According to Buck, the reduction in sales was consistent with expectations and started to improve in December.
This is a significant category for the company in 2024 because it's the category that will have to offset the earnings decline due to cocoa prices. However, the company expects sales from this category to be in line with 2023.
Long-term investors just got an opportunity
With blue-chip companies like Hershey, buy-and-hold investors need to pick their spots. In this case, HSY stock is trading about 7% below its pre-earnings price of around $208. Furthermore, the stock is trading near its 52-week low.
Every investor has different considerations, but these are generally the conditions when investors who have a long position in a stock get a buying opportunity. The Hershey analyst ratings on MarketBeat give the stock a consensus price target of $227.86. That's a 19% upside for a stock trading at 21x price-to-earnings (P/E), which is lower than its historical mean of 26x and in line with the sector average for consumer staples stocks.
That being said, HSY stock has been trading in a narrow range since October 2023, a time when the rest of the market has been on fire. In fact, the stock is up just 2% in the last three months. And it seems the company's best growth opportunities will come in the second half of the year.
Nevertheless, there's nothing fundamentally wrong with the company's business. Therefore, these are the pullbacks you look for as a long-term investor. And you're getting a dividend with a yield of 2.47% and one that has increased for 14 consecutive years.
