Jefferies has downgraded Hersheys from “hold” to “underperform” on expectations that the chocolate maker is likely to face significant challenges over the next three years on account of a decline in sales and margin compression.
Jefferies lowered its price target for Hershey from $184 to $163, representing a potential 16% downside from the stock’s last close.
The brokerage has forecasted a decline in sales volume and margin compression, as US consumers cut back on food spending due to inflationary pressures.
The analyst note highlights structural risks in the chocolate category, including rising cocoa costs and a generational shift towards non-chocolate confectionery.
Hershey’s share price was down by 0.8% on Thursday.
Rising cocoa costs and declining demand pose risks
According to Jefferies, cocoa prices have surged significantly over the past year, widening the price gap between chocolate and other snack options.
This inflation in raw materials is expected to hurt Hershey’s margins, as the company grapples with a “stretched” US consumer base already cautious about spending.
The downgrade also notes that Hershey is under-invested in chocolate brands outside of its flagship Reese’s and Hershey’s names.
The lack of diversification, coupled with the company’s predominantly US-focused business, makes it more vulnerable to the changing confectionery landscape, where non-chocolate snacks like gummies are gaining traction.
Jefferies analyst Rob Dickerson remarked, “Chocolate stands out as one of the most concerning categories,” with buy rates since 2019 trailing other snack products.
Dickerson further warned of accelerating volume declines as consumers shift toward more affordable, alternative snacks.
Hershey’s stock performance and outlook
Despite the challenges, Hershey’s stock has risen 2.4% year-to-date.
However, of the 25 brokerages covering the stock, only four rate it as a “buy” or higher, with 18 rating it a “hold” and three a “sell” or lower.
The median price target stands at $200, significantly higher than Jefferies’ revised target of $163.
Hershey’s surpassed both top and bottom-line estimates for its Q1 2024 earnings announced in May, demonstrating a robust performance in the face of evolving economic conditions and high cocoa prices.
However, the company maintained its projections for net sales growth to increase marginally by 2-3%, with no growth in earnings per share, and adjusted earnings per share, much to the disappointment of analysts.
With Hershey facing pressure from both rising input costs and changing consumer preferences, the company’s ability to adapt will be critical in maintaining its market position in the evolving snack industry.
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