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Will Hershey’s High Valuation Hurt Its Stock?

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May. 28 2019, Published 8:04 a.m. ET

Stock performance

Hershey (HSY) shares have risen 21.5% on a YTD (year-to-date) basis as of May 24 and outperformed the benchmark index. A better-than-expected financial performance in the first quarter and improved margins supported the upside in Hershey stock.

Hershey’s sales and adjusted earnings beat analysts’ estimates during the last reported quarter. Incremental sales from acquisitions, higher volumes, and increased pricing supported the top-line beat. Favorable input costs, cost savings, and a lower effective tax rate cushioned the bottom line.

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An improvement in the base business, incremental benefits from acquisitions, and low valuations drove the stocks of other major packaged food companies. For instance, J.M. Smucker (SJM), General Mills (GIS), Conagra Brands (CAG), and Mondelēz (MDLZ) shares have risen 35.5%, 35.6%, 35.0%, and 30.2%, respectively.

Valuation 

While we remain impressed with Hershey’s financial performance, its high valuation is a concern. In the first quarter, Hershey benefited from the timing shift in the Easter holiday. The company’s sales could remain pressured in the second half of 2019.

Hershey stock is trading at a forward PE ratio of 22.5x, which indicates a premium of ~40% compared to the peer group average of 16.1x. Hershey shares trade at a 10% premium compared to its four-year average historical multiple. Conagra Brands, Kellogg (K), J.M. Smucker, and General Mills shares trade at forward PE ratios of 13.9x, 14.7x, 15.2x, and 16.2x, respectively.

We expect Hershey’s bottom line to continue to grow in the coming quarters. However, the growth rate will likely stay low. Analysts expect Hershey’s bottom line to mark mid-single-digit growth in 2019 and 2020, which doesn’t make its current valuation attractive.

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