EUR 850.00 For Business Accounts Only

Morningstar | Wide-Moat Hershey Steadies Its Ship by Honing Its Focus on Its Home Turf; Shares a Touch Undervalued

We’ve long held that Hershey's wide moat had been eroding, as we thought it would be challenged to extend abroad, as evidenced in its China business over the past two years, where the firm has succumbed to a marked deceleration in overall market growth, as well as efforts to reduce trade inventories to match recent demand trends. However, we now believe the firm’s strategic decision to pull back spending abroad (one of the first directives CEO Michele Buck implemented when she took the helm in March 2017) and anchor its strategic endeavor in its core domestic arena (which already accounts for around 90% of its sales) stands to stabilize its competitive positioning, supporting our stable trend rating.

Even though we don’t anticipate its international presence (at only just over 10% of sales) stands to degrade Hershey’s competitive positioning, we still maintain that the firm is unlikely to take share beyond its borders (particularly since tastes and preferences vary around the world and in light of the pronounced competition it would face from several large and globally diversified firms, namely Mondelez, Nestle, and Mars/Wrigley). In this vein, Hershey’s share of the global chocolate space currently amounts to around 7%, which materially lags the low- to midteens held by Mondelez, Mars/Wrigley, and Nestle. And we expect the firm's growth to generally align with, or in some markets (notably China) to lag, that of the overall category.

We’re edging up our valuation to account for additional cash generated since our last update; our fair value estimate for Hershey now stands at $118 per share, up from $117. However, we haven’t made any changes to our longer-term forecast, which continues to call for 3%-4% average annual sales growth and operating margins improving to almost 24% by fiscal 2027 (a more than 300-basis-point increase relative to the past five years). Shares trade nearly 10% below our valuation, and we think investors should keep an eye on this name.