High valuation is to blame
On June 20, Piper Jaffray downgraded the Hershey Company (HSY) stock to “underweight” from “neutral,” citing the company’s high valuation. However, it raised its target price on the chocolate maker to $125 per share. In Will Hershey’s High Valuation Hurt Its Stock? we emphasized the fact that Hershey’s recent financial performance has been impressive, but the company’s high valuation makes us skeptical.
Hershey stock is trading at 24.1 times its 2019 estimated EPS of $5.72 and 22.9 times its 2020 estimated EPS of $6.01, both of which look expensive based on the company’s projected EPS growth rates of 6.6% for 2019 and 5.1% for 2020.
Hershey stock is trading at a premium of ~47% to the peer average of 16.2x. Its current valuation multiple is ~14% higher than its four-year average multiple of 20.9x.
In comparison, the shares of Conagra Brands (CAG), the Kellogg Company (K), and the J.M. Smucker Company (SJM) are trading at forward PE multiples of 14.1x, 14.3x, and 14.2x, respectively. Meanwhile, Mondelēz (MDLZ) stock is trading at a forward PE multiple of 21.8x.
What drove Hershey stock higher?
Hershey stock is up 28.7% YTD (year-to-date) thanks to improvements in its organic sales and its margins. The company’s bottom line exceeded analysts’ estimate during its last-reported quarter thanks to its higher pricing, cost savings, and lower effective tax rate.