While the broader stock market has been reaching new heights recently, Hershey (NYSE: HSY) has not exactly thrilled investors. After climbing to nearly $260 early last year, the chocolate and snack conglomerate’s stock has slipped by nearly 35%, settling around $170.
Yet, much like a Reese’s Peanut Butter Cup is more than just its chocolate coating, there’s more to this picture than just the fall in stock price might indicate.
Let’s dig deeper into the numbers with The Value Meter to see if this downturn presents a potentially rewarding opportunity.
To start, we need to examine Hershey’s enterprise value-to-net asset value (EV/NAV) ratio. This metric essentially shows what investors are willing to pay for the company’s assets. With an EV/NAV at 9.7, Hershey appears over 50% pricier than the average company.
This might cause some skepticism, but zeroing in solely on this metric might lead us to overlook the hidden potential within.
The magic, so to speak, lies in Hershey’s exceptional cash-generating capacity. The company has consistently produced positive free cash flow over the past four quarters. During this time, its free cash flow averaged 10.1% of its net assets, outshining the 7.8% average among peers.
This capacity to generate cash isn’t sheer luck—it’s rooted in Hershey’s strong market position and its ability to set prices.
Even amidst challenging conditions, Hershey’s free cash flow surged by over 90% to $567 million in the last quarter. The company brought in $3 billion in net sales, bolstered by 0.8% growth in its core North America Confectionery segment, and earned roughly $654 million in adjusted operating profits.
However, Hershey faces its share of challenges. Surging cocoa prices have driven up input costs, and the company is also having to adjust its portfolio to meet changing consumer habits, particularly the shift towards “better-for-you” snacks.
Nevertheless, Hershey has several strengths on its side. Having weathered numerous commodity cycles in its 130-year history, the company’s recent ventures into salty snacks, as seen with Dot’s Homestyle Pretzels’ 31% growth in the third quarter, lessen its dependency on chocolate. Crucially, Hershey’s brands hold premium shelf space and pricing, which helps sustain robust 41.3% gross margins, even in tough circumstances.
When comparing Hershey’s valuation with its extraordinary cash generation, strong competitive advantage, and proven resilience in navigating difficult cycles, today’s stock price seems like a bargain. It’s akin to discovering a forgotten chocolate bar in your cupboard; patient investors might be pleasantly surprised.
According to The Value Meter, Hershey is currently “Slightly Undervalued.”
What stock should we evaluate next with The Value Meter? Share the ticker symbol(s) in the comments section below.
