Hershey Has Cemented Its Edge in the U.S. Confection Aisle, but Shares Far From Sweet

Wide-moat Hershey’s HSY competitive prowess was on full display during its latest investor day in Hershey, Pennsylvania. But despite its recent success (boasting mid-single-digit annual sales growth and 200 basis points of operating margin expansion to 23% since CEO Michele Buck took the helm in 2017), management seems intent to charge ahead, prioritizing investments to enhance its capabilities and brand standing through stepped-up innovation, marketing, and distribution. This should ensure its fare wins with consumers and its entrenched retail standing doesn’t waver. Even so, we view shares as quite rich, trading at a 35% premium to our $180 fair value estimate (which remains in place), underpinned by our expectations for 3.9% average annual sales growth in the long term (at the high end of management’s 2%-4% target), against operating margins that hold in the low-20s through fiscal 2032.

While Hershey remains the undisputed leader in the U.S. confection segment, boasting 31% share (including 45% in chocolate, per IRI), it expanded its palate over the past five years to include a taste for “salty” (with the addition of Skinny Pop—approaching $500 million in annual sales—and Dot’s, which generates about $335 million sales a year). However, we don’t posit that this signals Hershey is taking its eye off core franchises. We see Reese’s (a $3 billion brand that has grown volumes 20% since fiscal 2017) as integral to the business, with the firm expanding capacity for this brand by 60% over the past five years. From our vantage point, its recently acquired salty fare complements its sweet standing and unlocks potential for innovation that blends the two taste profiles, which Hershey is uniquely positioned to achieve. And to ensure this work hits the mark, the company is calling for a double-digit bump in advertising in the year ahead; we forecast Hershey will judiciously expend a high-single-digit percentage of sales toward research, development, and marketing annually.