Buy Hershey Amid Financial And Technical Strength (NYSE:HSY)

The Hershey Company (NYSE:HSY) showcased a robust improvement in Q3 2023 financial results, highlighted by a substantial uptick in net sales. This impressive growth was primarily attributed to a boost in organic sales, which stemmed from strategic price revisions aimed at countering inflationary pressures. Hershey’s adept handling of pricing and cost control strategies was evident. Furthermore, the company saw a noteworthy rise in its gross margin, indicating its successful maneuvering through the increased expenses tied to production and raw materials. This piece provides an in-depth financial and technical examination of the stock price to discern its upcoming trajectory and pinpoint potential investment opportunities. It has been noted that the stock is currently undergoing a correction phase, which investors should view as a prime investment opportunity.

Financial Surge with Strong Sales and Profit Growth

The Hershey Company showcased a solid financial standing in Q3 2023, with total net sales escalating by 11.1% to $3.03 billion. The uptick was predominantly driven by a 10.7% increase in organic net sales on a constant currency basis. Volume increments were slight but intentional, underpinned by planned inventory increases within the North American Salty Snacks division in anticipation of the new ERP system debut in early October. Hershey’s strategic pricing measures led to a notable gross margin elevation, soaring from 40.6% in Q3 2022 to 44.9% in Q3 2023, marking a 430-basis-point surge. This underscores Hershey’s adept management in pricing and efficiency enhancements that adeptly counterbalanced rising costs in production, raw materials, and general overhead.

The company’s increased revenue was met with disciplined expense management, although it grappled with elevated selling, marketing, and administrative expenditures, which witnessed a 13.1% year-over-year climb. This was mainly due to a 20% increase in outlays for advertising and consumer marketing, reflecting Hershey’s intensified investment in its brand portfolio. Nonetheless, Hershey succeeded in keeping a tight rein on overall expenses, which saw a moderate rise of 9.9% when excluding advertising and marketing costs, mirroring the effects of wage and benefits inflation, as well as capability and technology investments. The chart below displays Hershey’s quarterly revenue and net income, demonstrating a pronounced upward trend in profitability.

Hershey’s operating profit for Q3 2023 stood out remarkably, with a jump of 32.2% to $735.9 million and operating profit margin growth of 390 basis points to 24.3%. The adjusted operating profit also depicted a buoyant scenario, climbing by 22.4% to $753.4 million, with the margin widening by 230 basis points to 24.9%. These profit escalations were backed by the company’s adept price realization and efficiency gains, which more than compensated for the escalating costs related to brand promotion, acquisition-related expenditures, and the broader inflationary milieu.

For 2023, Hershey anticipates a net sales growth of approximately 8%. The company forecast a reported EPS growth of 13% to 15% and an adjusted EPS growth of 11% to 12%. The company has adjusted its overall tax outlook, expecting a slightly higher investment in tax credits, resulting in a lowered tax rate compared to previous predictions and an effective tax rate of around 15%. Additionally, Hershey is set to incur an “other expense” of about $225 million to $230 million, mainly due to the write-down of equity investments eligible for a tax credit. Interest expenses are projected to be around $155 million. The firm also plans to invest between $800 million and $850 million in capital expenditures, primarily focusing on increasing its core confection capacity and advancing its digital infrastructure, which includes introducing and enhancing a new ERP system across the enterprise.

Conclusively, Hershey’s robust financial performance in Q3 2023, characterized by significant sales growth and margin expansion, reflects the company’s strategic acumen in navigating market challenges and investing in growth. With disciplined fiscal management, investment in brand and infrastructure, and proactive adaptation to dynamic market conditions, Hershey is well-positioned to sustain its upward trajectory in profitability and shareholder value.

Exploring Technical Price Structures

The technical prospects for Hershey appear highly optimistic, as evidenced by the monthly chart below. Following a robust recovery from the Great Recession, the price has soared, climbing 1169.37% from its 2009 low of $21.61 to an unprecedented peak of $274.31.

This strong rally was due to strategic business decisions and broader market trends. Post the financial crisis of 2008, Hershey invested heavily in advertising and expanding its product lineup, which helped the company capture a larger market share. Their focus on brand strength and consumer loyalty paid off, as the company was able to leverage its iconic brands to drive sales. Furthermore, emerging markets provided new growth avenues as Hershey capitalized on rising disposable incomes and a growing appetite for confectionery products. Hershey’s strong supply chain management and pricing strategies also played a significant role in boosting profitability, which, in turn, enhanced investor confidence and drove up the stock price.

Additionally, Hershey’s stock price experienced a significant boost from consumer purchasing patterns driven by the pandemic and the company’s clever adjustments to the new market conditions after 2020. As consumers stocked up on comfort foods and snacks during lockdowns, Hershey’s products saw an uptick in demand. The company’s swift pivot to e-commerce and digital marketing allowed it to reach consumers even as traditional retail channels were disrupted. Additionally, Hershey’s ongoing commitment to sustainability and social responsibility initiatives began to attract a growing segment of socially conscious investors. The low-interest-rate environment post-2020 also played a role, as investors sought refuge in stocks with stable dividends and resilient business models, further inflating the stock price amidst a volatile market.

After May 2023, Hershey’s stock price dipped as consumer spending shifted away from confectioneries to essential goods amidst rising inflation concerns. The company also faced supply chain disruptions that led to higher production costs and affected profit margins, prompting investors to reevaluate the stock’s valuation. Furthermore, a cooling off of the pandemic-era demand for comfort foods resulted in reduced sales forecasts for Hershey, leading to a bearish sentiment among investors and a consequent drop in the stock price.

This significant price drop has been under considerable strain, as evidenced by the monthly candles for the past six months. This downward trend was initiated from a peak of $274.31 and has been on a persistent slide, approaching critical support thresholds. The Fibonacci retracement levels from 2009 to 2023 indicate that the 38.2% and 50% retracement levels are positioned at approximately $177.78 and $147.96, respectively. These levels are deemed to be robust support zones. As the price approaches the 38.2% Fibonacci level, there is potential for a substantial bounce in the stock’s value. Additionally, the continued downward trend towards the 50% retracement mark might encounter the ultimate support, setting the stage for a possible upward surge.

Key Action for Investors

To gain a deeper insight into the robust bullish sentiment surrounding Hershey, the weekly chart below presents the price under oversold territory. It demonstrates pricing pressure, yet an inverted head and shoulders pattern in 2020 solidifies the bullish sentiment. The head of this pattern lies at $102.61, with the shoulders at $128.60 and $126.56. This suggests that any recent price pullback should be seen as a compelling buying opportunity for investors. The levels at $177.78 and $147.96 are identified as substantial support zones, offering favorable entry points for investment. It is advisable for investors to initiate positions at $177.78 and to consider increasing investment if prices decline to $147.96. Additionally, the weekly chart’s RSI signals an oversold condition, which could foreshadow a potential price recovery from the present levels.

Market Risk

Hershey’s financial resilience in the face of rising production and raw material costs indicates a strong market position, yet the company is not impervious to broader economic pressures. The uptick in general and administrative expenses, including a 20% increase in advertising and marketing outlays, reflects an aggressive investment in brand and market share that could be at risk in an economic downturn where consumer spending contracts. While the company’s disciplined expense management and strategic pricing have thus far effectively countered these rising costs, there’s an inherent risk should inflation persist or worsen, potentially squeezing margins if prices can no longer be raised without affecting demand.

Internationally, Hershey faces currency risk, as fluctuations in exchange rates could adversely affect the value of its overseas sales and profits. Moreover, the commitment to significant capital expenditures-between $800 million and $850 million-to enhance confection capacity and digital infrastructure, while crucial for growth, presents short-term financial risks. Such hefty investments in the face of uncertain economic conditions may strain cash flow. Technical analysis suggests a potential bearish trend for Hershey’s stock, with crucial support levels identified by Fibonacci retracements being tested. Yet, if the price falls below $147.96, it will undermine the positive trend and signal additional downward movements in price.

Bottom Line

Hershey’s latest financial results illustrate a company that has adeptly navigated a complex economic landscape to deliver impressive growth. In the face of inflationary pressures and increased costs, Hershey has demonstrated a keen ability to manage expenses and execute strategic pricing adjustments, resulting in a robust enhancement of net sales and operating profits. The disciplined approach to expense management, coupled with strategic investments in production capacity, digital infrastructure, and brand promotion, underscores the company’s commitment to sustained operational efficiency and market expansion. Despite the significant price drop in 2023, the long-term forecast is optimistic, bolstered by solid support levels at $177.78 and $147.96. Investors may consider buying at $177.78 and increase positions if the price dips to $147.96, expecting a future uptrend in value.