Hershey May See Margin Pressure Due To Soaring Cocoa And Sugar Costs: Analyst Cautions

Piper Sandler analyst Michael S. Lavery reiterated the Overweight rating on The Hershey Company HSY, lowering the price target to $240 from $285. 

Lavery notes that Cocoa costs are up ~50% in 3Q23TD, at record levels. HSY hedges 3-24 months out, so there is little near-term impact, and it can generally be an opportunistic buyer, given its coverage, the analyst thinks.

These price levels are likely unsustainable and seem driven more by speculation than fundamentals. 

Hence, the analyst expects cocoa pricing to roll over in the coming months but will monitor how it progresses.

Sugar is up ~38% in 3Q23TD, driven partly by global shortages and likely some speculation, mentions Lavery.

Considering the costs, margin assumptions for 4Q23 and 2024 have been updated to allow for greater input cost pressure. Lavery lowered margins in the Confectionery segment by ~100bps in 2024. 

If costs remain elevated, the analyst expects further pricing actions and update estimates to be more conservative. 

On the positive side, HSY outperformed peers last year during Halloween, helping it secure a greater share of sell-in with retailers for this year, too, the analyst adds.

According to a National Retail Federation survey of 8,000 adults, Halloween spending is expected to be $12.2 billion in 2023, up 13% from last year. 

HSY is implementing ERP in Salty Snacks in 2023, integrating the businesses onto one platform and driving back-office consolidation, the analyst notes.

Lavery expects capacity expansions will be more efficient but also fuel better productivity savings by removing 'ad hoc' costs and inefficiencies from supply constraints.

Price Action: HSY shares are trading higher by 0.50% to $209.20 on Friday.