Hershey is a compounder, a company that generates best-in-class risk-adjusted returns through economic cycles. The company's recurring revenues are built on dominant and durable intangible assets which have demonstrated pricing power. It has lower capital intensity than other consumer staples companies and earns higher margins. Hershey's shares have pulled back since the Q2 results.
For the webcast replay CLICK HERE. |
Our investment thesis:
- HERSHEY HAS PRICING POWER: Hershey’s brands have demonstrated best-in-class pricing power during a period of once in a generation inflationary pressure. With continued inflationary pressures in key ingredients, 2023 will be another year of pricing-led growth and margin expansion. Hershey has one of the best secular growth prospects in food. The company has improved its M&A integration process giving it the confidence to seek more targets. Hershey has made a series of acquisitions in the category to grow its platform.
- NEW CONCERNS: A volume miss, concerns over GLP-1 drugs' impact on demand, and new competitive threats have put pressure on the shares. We will examine the concerns, stress test the risks, and outline the opportunities.
- VALUATION OPPORTUNITY: This year will be another year of sales and EPS growth above the long-term targets of 2-4% and 6-8% respectively. Hershey will be differentiated from CPG companies by having gross margin and EBITDA margin expansion while also having volume growth. We expect the margin recovery and sales visibility to be drivers of share price outperformance over a trade and trend duration.
Our Black Book Reviewed in detail an analysis of the following:
- Margin outlook, input cost pressures, and pricing
- Opportunity in snacks
- M&A potential
- International opportunity
- Competitive landscape
- Demand risk from GLP-1 drugs
- Model variance
- Valuation breakdown
