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Why Morgan Stanley Downgraded Hershey Stock

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Hershey stock fell 2.6%

On January 10, 2018, Morgan Stanley downgraded Hershey (HSY) stock to “underweight” from “equal weight” with a price target of $105.00 per share. Following the downgrade, Hershey stock fell 2.6% to $110.82.

Hershey stock had a decent run in the past couple of months owing to slow but steady sales amid a tough operating environment. However, Hershey trades at a significant premium when compared with its peers, which analyst Matthew Grainger termed “overextended.” There has been a shift in demand for wellness foods and competitors narrowing the sales gap.

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Grainger commented that Hershey’s stock performance is showing signs of a disconnect with its fundamentals. He sees a limited upside to Hershey’s margins as pressure on margins are likely to offset the benefits of lower cocoa costs and cost-saving measures. This pressure stems from the tough retail environment and the need to reinvest in its product portfolio to address the changing needs of consumers.

Going forward, Grainger expects the company’s sales growth rate to decelerate, which would impact its bottom line. The analyst lowered his EPS estimates for 2018 and 2019 by 1.0% and 2.5%, respectively.

Rating summary and target price

Of the 18 analysts covering Hershey stock, 61.0% suggested a “hold” rating, 28.0% recommended a “buy,” and 11.0% had a “sell” rating. Analysts suggested a target price of $114.06 on HSY stock, which implies an upside potential of 2.9% to its closing price of $110.82 on January 10, 2018.

Analysts maintained a positive outlook on the stocks of Mondelēz International (MDLZ), Kraft Heinz (KHC), and Conagra Brands (CAG), among other packaged food manufacturers in the US (SPY).

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