Supply chain disruptions, geopolitical crisis, runaway inflation, aggressive interest-rate hikes, and ever-increasing fears of an economic slowdown; the economy has faced and weathered it all last year.
These factors have negatively impacted returns and soured the sentiments of most investors who have braced themselves for an even-tougher 2023. While the fruits of patience tasted sour over the past year, The Hershey Company (HSY) stood out as a sweet exception.
The world-renowned manufacturer and seller of confectionery products and pantry items operate through three segments: North America Confectionery; North America Salty Snacks; and International.
While various sectors and businesses are keen to run a tight ship amid rough seas of increasing borrowing costs and softening consumer demand due to decreasing discretionary expenditure, HSY’s demand inelasticity has empowered it to revise its net sales and earnings per share growth percentages upward.
Moreover, on November 10, the company announced that it would build a new 250,000-square-foot chocolate facility in Hershey, Pennsylvania. Pending final planning approvals, the new facility will support production capabilities for its iconic candy brands, like Reese’s, Kit Kat®, and Hershey’s.
In contrast to the S&P 500’s decline of more than 16%, HSY has gained 14.8% over the past year to close the last trading session at $225.65, above its 200-day moving average of $223.87.
Let’s closely examine the factors that make it likely to prolong its purple patch in 2023.
Stellar Track Record
HSY’s revenues have grown at 8.5% CAGR, while its EBITDA has grown at 8% CAGR over the past three years. During the same period, the company’s net income has grown at a 7.4% CAGR.
Robust Financials
During the third quarter of the fiscal year, ended October 2, 2022, HSY’s consolidated net sales increased 15.6% year-over-year to $2.73 billion. This topline growth includes a 4.1-point benefit from Pretzels and Dot's acquisitions and a 0.3-point headwind due to foreign currency exchange.
During the same period, HSY’s non-GAAP gross profit increased 10.8% year-over-year to $1.16 billion, while its non-GAAP operating profit increased 9.3% year-over-year to $615.29 million.
As a result, HSY’s non-GAAP net income increased 2.8% and 3.3% year-over-year to $447.07 million or $2.17 per share, respectively.
Higher-than-industry Profitability
HSY’s trailing-12-month gross profit margin of 43.27% is 36.7% higher than the industry average of 31.66%. Likewise, the company’s trailing-12-month EBITDA and net income margins of 25.32% and 15.69% are 118.4% and 277.6% higher than the industry averages of 11.59% and 4.16%, respectively.
Moreover, HSY’s trailing-12-month ROCE, ROTC, and ROTA of 56.46%, 17.65%, and 14.62%, also exceed the industry averages of 10.59%, 6.18%, and 3.62%, respectively.
Healthy Dividend Payouts
On December 15, 2022, HSY paid a quarterly dividend of $1.036 on the common stock and $0.942 on the Class B common stock. It is the 372nd consecutive regular dividend on the common stock and the 153rd consecutive regular dividend on the Class B common stock.
HSY pays $4.14 annually as dividends, translating to a yield of $1.84% at the current price. Its four-year average dividend yield is 1.99%.
HSY pays 45.65% of its earnings as dividends. Its dividend payouts have grown for 13 consecutive years. Over the past five years, its dividends grew at an 8.7% CAGR.
Favorable Analyst Estimates
Analysts expect HSY’s revenue and EPS for fiscal 2022 to come in at $10.35 billion and $8.27, up 15.3% and 15% year-over-year, respectively. For fiscal 2023, its revenue and EPS are expected to increase by 6.2% and 8% year-over-year to $10.99 billion and $8.93, respectively.
Furthermore, HSY has impressed with positive EPS surprises in each of the trailing four quarters.
POWR Ratings Reflect Stable Prospects
HSY has an overall rating of B, equating to a Buy in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Our proprietary rating system also evaluates each stock based on eight distinct categories. HSY also has a grade B for Quality, consistent with its high profitability.
HSY is ranked #29 of 83 stocks in the B-rated Food Makers industry. Click here to access additional POWR Ratings for HSY’s Growth, Momentum, Sentiment, Value, and Stability.
Bottom Line
HSY has not just delivered growth with profitability but has also rewarded its backers with a steady income in the form of consistent dividend payouts.
With inelastic demand, expansion plans, and a positive outlook, this consumer stock looks set to keep delivering returns as sweet as its products.
How Does The Hershey Company (HSY) Stack up Against Its Peers?
HSY has an overall POWR Rating of B, equating to a Buy rating. Check out its peers with an A (Strong Buy) rating: Sysco Corporation (SYY), Pilgrim's Pride Corporation (PPC), and Industrias Bachoco, S.A.B. de C.V (IBA).
HSY shares were trading at $225.60 per share on Monday afternoon, down $0.05 (-0.02%). Year-to-date, HSY has declined -2.58%, versus a 1.65% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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