Here's A Sweet Investment Idea: Buy Hershey To Play Falling Cocoa Prices

Good news for your sweet tooth and your food portfolio: Cocoa’s getting cheaper.

The price has fallen 37 percent since last summer and, based on Bernstein research, could continue to drop over the next few years.

As cocoa comprises an estimated 10 to 15 percent of Hershey Co HSY’s cost of goods sold, analyst Alexia Howard considered the trend a positive catalyst and upgraded the company’s stock Thursday to Outperform.

“Easing cocoa prices could be a major tailwind as we move out into 2018, more than offsetting the relatively mild inflation in dairy prices,” Howard wrote in a note. “The last time cocoa prices declined in 2011, the company saw its gross margin improve from 42.4 percent in 2011 to 46 percent by 2013.”

Her thesis is bolstered by expectations for growth in U.S. chocolate driven by millennial snacking trends and expanding product innovation as Mondelez International Inc MDLZ ups its competition.

“Although Mondelez's entry into the U.S. chocolate market could weigh on Hershey's market share, increased competition appears to be boosting category growth as Hershey, Mars, and Nestle increase innovation and marketing spend,” Howard wrote. “Net net, Hershey's chocolate sales were up 2.4 percent in measured channels last month, with the category up by 3.6 percent ━ much better than other packaged food companies in our coverage.”

Additionally, Hershey benefits from the U.S. government’s delay to require food labels to report added sugars and the percentage of daily sugar allowance in foods. The company’s standard bar represents two-thirds of recommended sugar limits.

Bernstein raised its price target from $109 to $127, and at the time of publication, Hershey was trading up 2 percent around $108.

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