How Should You Play Hershey Stock at a P/E Multiple of 20.2x?

The Hershey Company HSY appears to be trading at a premium, with its price-to-earnings (P/E) ratio higher than both the Zacks Food – Confectionery industry and the broader Consumer Staples sector. Hershey’s forward 12-month P/E ratio stands at 20.16, surpassing the industry average of 17.26 and the sector average of 16.52. This elevated valuation has raised concerns among investors about whether the stock's current price is justified.Hershey’s high P/E ratio, coupled with its low Value Score of D, suggests that it may not offer strong value at its current price levels. Recently, the company’s stock has experienced a decline of 12.8% over the past three months, underperforming the industry’s average drop of 10.5%.The technical indicators reveal that the stock is currently trading below both its 50-day and 200-day moving averages, signaling weak momentum and a lack of investor confidence in the company’s performance. Given these factors, investors are left wondering how to approach HSY stock.Let’s dig deeper to find out.Image Source: Zacks Investment ResearchHSY Struggles in a Challenging Economic LandscapeHershey is operating in a challenging environment, thanks to historically high cocoa prices and a stretched consumer base, which continue to pressure its results. Total snacking consumption softened in the third quarter of 2024 as people prioritized value and budgeted for meals. Consumer behavior has shifted toward value-seeking due to economic pressures, prioritizing budgets for essentials and reducing foot traffic to convenience and drug stores where Hershey’s brands are over indexed.In addition, shopping shifts to club, dollar and online channels — where the company’s products are less developed — are further complicating matters. Tighter inventory management by customers is impacting North America Confectionery and North America Salty Snacks. Hershey is also facing increased competition across all product segments.The company is grappling with continued margin pressure, a trend that extended into the third quarter. The adjusted gross margin was 40.3%, which contracted 460 basis points (bps). This decline was caused by increased commodity costs, unfavorable timing of input costs, fixed cost deleverage and a negative mix, which offset gains from price realization and productivity improvements.Hershey Braces for Tough Times AheadIn its last earnings call, the company lowered its 2024 guidance, reflecting an increasingly challenging landscape. In light of current consumer and channel pressures, Hershey expects its sales to be nearly flat year over year, down from the previous forecast of around 2% growth. The adjustment to the sales outlook is driven by a weaker-than-expected third-quarter performance, ongoing competitive and consumer pressures and lower-than-anticipated retailer inventory levels in key categories such as confectionery and salty snacks. As a result of the reduced sales forecast, Hershey now projects its full-year adjusted earnings per share (EPS) to decline by mid-single digits. This marks a revision from the earlier outlook, which anticipated only a slight decline in EPS.HYS’s Estimates Take a HitHershey appears to be in a troubled spot. The Zacks Consensus Estimate for the current and next year’s EPS has moved downward by 0.1% and 1.7% to $9.06 and $8.02, respectively, in the past 30 days. This downward adjustment reflects a negative sentiment among analysts and suggests potential challenges in achieving projected profitability.Find the latest EPS estimates and surprises on Zacks Earnings Calendar.HSY’s Investors GuideGiven the current challenges facing Hershey, including shifting consumer behaviors and margin pressure, investors should approach HSY with caution. While the company remains a strong player in the confectionery market, its premium P/E ratio, low Value Score and downward earnings revisions indicate potential risk in the near term. Investors should closely monitor the company’s performance and consider whether the stock’s valuation aligns with its future growth prospects in this challenging economic environment. At present, HSY carries a Zacks Rank of 5 (Strong Sell).Some Solid Staple BetsWe have highlighted three better-ranked stocks from the Consumer Staples sector, namely United Natural Foods, Inc. UNFI, Freshpet FRPT and US Foods Holding Corp. USFD.United Natural currently sports a Zacks Rank of 1 (Strong Buy). UNFI delivered a trailing four-quarter earnings surprise of 553.1%, on average.You can see the complete list of today’s Zacks #1 Rank stocks here.The consensus estimate for United Natural’s current financial-year sales and earnings suggests growth of 0.3% and 442.9%, respectively, from the year-ago period’s reported figure.Freshpet, a pet food company, presently sports a Zacks Rank #1. FRPT has a trailing four-quarter earnings surprise of 144.5%, on average.The Zacks Consensus Estimate for Freshpet’s current financial-year sales and earnings suggests growth of 27.2% and 228.6%, respectively, from the year-ago period’s reported figure.US Foods, together with its subsidiaries, engages in the marketing, sale and distribution of fresh, frozen and dry food and non-food products to food service customers in the United States. It currently carries a Zacks Rank #2 (Buy). USFD delivered a negative earnings surprise of 0.4% in the last reported quarter.The Zacks Consensus Estimate for US Foods Holding’s current fiscal-year sales and earnings indicates growth of 6.4% and 18.6%, respectively, from the prior-year reported levels.Only $1 to See All Zacks' Buys and SellsWe're not kidding.Several years ago, we shocked our members by offering them 30-day access to all our picks for the total sum of only $1. No obligation to spend another cent.Thousands have taken advantage of this opportunity. Thousands did not - they thought there must be a catch. Yes, we do have a reason. We want you to get acquainted with our portfolio services like Surprise Trader, Stocks Under $10, Technology Innovators,and more, that closed 228 positions with double- and triple-digit gains in 2023 alone.See Stocks Now >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Hershey Company (The) (HSY): Free Stock Analysis Report Freshpet, Inc. (FRPT): Free Stock Analysis Report United Natural Foods, Inc. (UNFI): Free Stock Analysis Report US Foods Holding Corp. (USFD): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks