Why Hershey's May Deliver A Sweet Surprise This Earnings Season

As investors look forward to the second-quarter earnings season, they should take a close look at The Hershey Company (NYSE:HSY). The company may deliver a pleasant surprise when it reports earnings in early August. The first reason for my optimism is the recent news that a federal judge in Washington D.C. dismissed a child slavery lawsuit in which Hershey’s was named as a defendant.

Putting that story behind it can allow investors to focus on the second piece of news that may be more immediately accretive to their bottom line. Earlier this year, the company announced a 14% weighted average price increase. This includes a 17% increase on its iconic Hershey bars and a 13% hike on the king-size version of its products.

A Hedge Against Inflation

The playbook for investing in this bear market can be as simple as finding companies with pricing power. These companies are likely to continue to post solid revenue and earnings no matter how muddled the macroeconomic picture looks. Based on the company’s earnings report in April, it has no problems passing prices to its customers.

In its most recent quarter, the company posted a 16% year-over-year (YOY) increase in revenue and a 31% YOY increase in earnings. And for the trailing 12 months, the company has delivered an 18% YOY increase in earnings.

The Fundamentals Look Solid

The company also generated an impressive 28% YOY increase in free cash flow (FCF) between 2020 and 2021. And the $1.59 billion of FCF the company, posted in 2021 exceeded the pre-pandemic year of 2019 by 10%.

With both revenue and earnings projected to rise steadily over the next five years, the company should continue to generate strong free cash flow that should alleviate any concerns that some investors have over the company’s debt ratio, which is a bit high compared to other companies in the sector.

And while there are better options available for pure dividend investors, the company’s strong cash position means that its current dividend (which has increased for 13 consecutive years) is not in jeopardy.

A Sweet 5-Year Trend

HSY stock has shown five-year solid growth. If an investor bought shares on Jun. 28, 2017, they’ve received a share price growth of 104%. And their total return will be higher if they’ve reinvented the company’s dividend, which Hershey’s has increased in the last 13 years.

And for the “what have you done for me lately” crowd, there are two bits of good news. In the last 12 months, HSY stock has been up 27%. And in 2022, the stock will be up 13.6%. And even in the volatile period in equities since Memorial Day, Hershey’s stock is up 4%.

This shows that Hershey’s has a story beyond just being a pandemic winner. Consumers are still finding comfort in the company’s products. And that is likely to continue in the second half of the year, which features two of the company’s strongest periods of demand.

What to Do With HSY Stock

In a bear market, it’s important to see the forest through the trees. It’s not a time to be indiscriminately buying. But if you’re looking for quality companies with pricing power and products that will be in demand, you will do fine.

With that said, the analysts tracked by MarketBeat suggest that the HSY stock price has topped out. However, the most recent price targets are above the consensus. The expectation is that analysts will be lowering their price targets and ratings during this earnings season. That may be true, but if Hershey’s continues to deliver strong results, the stock may be difficult to ignore.

I’ll admit to sleeping on Hershey’s stock, but I’m wide awake now. It’s on my watchlist, and I suggest you keep it on yours. In a sour market, we could all use a taste of something sweet.

Original Post