Hershey trades at a premium
On March 21, 2018, Hershey (HSY) stock was trading at a forward PE (price-to-earnings) multiple of 18.3x, which was higher than the peer group average of 15.4x. The company is also trading at a higher multiple than that of the S&P 500 Index, which is trading at a forward PE multiple of 17.8x.
Analysts expect Hershey’s top line to benefit from new product launches and incremental sales from the acquired brands. Its bottom line is expected to generate double-digit growth in 2018, reflecting benefits from its Margin for Growth initiative and its Amplify acquisition.
The forward PE multiple depends on the leverage profile and growth expectations. Investors could be willing to pay a premium for high-growth companies.
In Hershey’s case, a demand shift toward fresh and healthy foods, an anti-sugar sentiment among health-conscious consumers, and higher packaging, manufacturing, and logistics costs could remain a drag on its growth.
Mondelēz (MDLZ) and J.M. Smucker (SJM) offer better growth rates with healthy dividend yields. These stocks also trade at lower PE multiples. On March 21, 2018, J.M. Smucker and Mondelēz stock were trading at PE multiples of 13.4x and 17.0x, respectively.
Lower valuation multiples fail to attract investors
As we discussed above, industry-wide weak demand for packaged foods, low sales growth expectations, and near-term margin headwinds are impacting the attractiveness of some food manufacturers.