The Hershey Company (NYSE:HSY) has been going through one of a year with the stock seeing a severe pullback that seems to have bottomed but still fatigues to climb back its way up. Even though analysts’ expectations were very low for Hershey’s Q2 earnings, the company reported a miss, with EPS 12.6% lower compared to the forecast. Nonetheless, the stock didn’t plunge, perhaps thanks to the correct way Hershey’s management has communicated with investors since late 2023, informing them a flat year was coming. When the company reported its Q4 and FY2023 results, its CEO Michele Buck admitted once again that the environment was tough for several reasons: not only consumers were pulling away from discretionary spending, but cocoa and sugar prices were soaring, putting further pressure on Hershey’s margins.
I simply bought more shares and braced for impact. Don’t get me wrong. I am not fond of losses or companies in trouble. But I like to see weak stock prices of healthy companies whose operations I believe to understand well and whose long-term trajectory seems headed in the right direction. Before buying Hershey, I had it on my watch list for over two years, thanks to its remarkable profitability metrics, which more than compensate for its slow growth.
However, even though the last report was a miss, the stock didn’t trade down. This is because Hershey’s stock is more correlated to cocoa, especially when cocoa goes up. We can see that for the past few months, cocoa has been trading down, even though it is still at sky-high prices. But this new direction of the commodity price has been welcomed by investors who gave a pass to the company’s Q2 report. In addition, sugar has been retracing, too. This obviously helps Hershey as well. Not surprisingly, the Q&A session of the earnings call was focused mainly on cocoa prices.
At the end of Q1, Hershey was confident enough about its prospects that it surprised investors by hiking its dividend by 15%. This came without endangering the balance sheet and keeping the payout ratio below 50%. This meant: “Stick with us, and you will see free cash flow generation for many years to come”.