By Jacob Sonenshine

A slate of headwinds has crushed Hershey's earnings and stock price. As the search for a new CEO begins, the worst is over, and the stock has potential to pop.

Analysts are forecasting that the food company's earnings this year will be 19% lower than in 2023, according to FactSet. They expect the cost of goods -- everything from paper wrappers to ingredients -- to be up significantly from 2023, as the price of cocoa has surged over the past couple of years on the back of shortages in Africa. The company's price increases -- 2% in the fourth quarter -- weren't enough to fully offset higher costs.

Even as the company cuts its operating costs, it can't be too aggressive. It still has to invest in enough marketing to sell its products -- and in technology to identify the right ones to sell. The result is that its operating profit margin is expected to fall almost five percentage points from 2023 to 19% this year.

The overall sales picture hasn't been pretty either. Last year's sales declined modestly to $11.16 billion. Healthier snacks have moved into favor with consumers and have replaced some shelf space at retailers for the chocolate bars and gummy candies Hershey sells.

Shares have been almost halved from record highs of $275 hit in spring 2023. They're down 13% in the past month to $155 -- and down 24% since Barron's recommended them last March. They now trade at just under 20 times expected earnings for the coming 12 months, below the S&P 500's 21 times. Historically, Hershey tends to trade at a hefty premium given its pricing power and earnings stability, strengths that make the stock look cheap if it can return to growth soon.

Cocoa prices will eventually stabilize after having gained more than threefold since spring 2023. They're already down from their peaks, and that type of gain in commodity prices doesn't tend to last. Analysts forecast that the cost of goods will rise less than 2% in 2026. That, combined with moderate price increases in its products and continued cost discipline, would nudge Hershey's operating margin back up to 20%. Combine that with a stabilization or slight growth in volumes, and earnings can jump.

Earnings are expected to be down this year, and that is already reflected in the stock price. That makes 2026 profits the key driver for the stock this year, especially as the board searches for a new CEO. Current chief Michele Buck will retire at the end of June.

Signs of improvement are already under way. Morningstar analyst Erin Lash says that consumers aren't consistently sticking with their purchases of healthier options, leaving the door open for Hershey's newer options such as Reese's caramel cups and KitKat pink lemonade wafer candy to win back shelf space. In 2023, management focused less on new offerings and more on technology to identify what types of products consumers want. That hurt revenue in 2024, Lash says, adding that its new offerings should persuade retailers to give Hershey more shelf space in hopes that consumers will be intrigued by the newness.

Hershey's chocolate revenue rose 4.3% year over year in December after a flat November, according to Evercore. The broader chocolate category's growth also improved month over month -- and Hershey's growth was a few tenths of a percentage point above the category for both months.

This bodes well for the stock. Analysts expect earnings to grow 9% to $8.47 in 2026 from $7.79 this year, as management moves prices up a bit, volumes recover, and cocoa prices come back down, supporting higher margins. The stock could gain more than 9% from today if that proves to be true.

That would be mother's milk for investors.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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January 16, 2025 03:00 ET (08:00 GMT)

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