Cocoa Costs Can't Sweeten Hershey: Morgan Stanley Downgrades To Sell

With healthy snacks still trending, Hershey Co HSY’s looking bitter. The firm caught its only Sell rating Wednesday and saw a related pullback in value.

The Rating

Morgan Stanley analyst Matthew Grainger downgraded Hershey to from Equal-Weight to Underweight with a $105 price target.

The Thesis

Hershey has a growing disconnect between stock performance and fundamentals, Grainger said in a Wednesday note. (See the analyst's track record here.)

“We see HSY's 20-percent valuation premium to peers as overextended given HSY's narrowing growth gap to peers,” he said.

Morgan Stanley expects the sales gap to further contract as consumers favor healthy snacks; innovation slows; and competition rises from Mars, Ferrero and Mondelez International Inc MDLZ.

At the same time, Hershey's margin upside is limited by increased retailer pushback and the negative mix associated with a shift from instant consumables and lower-margin snacks, Grainger said. Morgan Stanley anticipates limited scope of upside amid reinvestment needs, which offset benefits from restructuring and declines in cocoa costs.

Altogether, Grainger said he expects slower sales growth in 2018 and 2019 and accordingly lowered earnings per share estimates 1 percent and 2.5 percent, respectively.

Risks to the thesis include margin expansion from cocoa deflation, improved growth in chocolate sales and improved market share, Grainger said.