Hershey ($HSY) is currently confronting significant downside risks regarding Wall Street's earnings estimates for the fiscal year 2025. These risks stem primarily from elevated cocoa prices, which are anticipated to substantially compress the company's gross margins. According to a recent analysis by UBS Securities, the brokerage has downgraded Hershey from a 'buy' rating to 'neutral' and has lowered its price target from $226 to $209.
In response to these developments, Hershey's shares dropped by 2.5% in afternoon trading, settling at approximately $187.2. UBS analysts, including Peter Grom, emphasize that the crux of the downgrade hinges on a perception that the current earnings estimates for 2025 appear overly optimistic given the ongoing pressures related to input costs, particularly cocoa, combined with a demand environment that continues to be uncertain and challenging.
Notably, cocoa comprises roughly 15% to 20% of Hershey's cost of goods sold, and its inflation is projected to be considerable. As a result, UBS expects the company's gross margin to contract by 240 basis points year-over-year, dropping to 41.4% in 2025, which is 30 basis points lower than the Visible Alpha consensus estimate. Looking ahead to 2024, UBS has revised its earnings-per-share estimate downward to $9.44 from a previous $9.49, which also falls below the market expectation of $9.47.
The estimate for fiscal 2025's EPS has been slashed by 7% to $8.80, a notable deviation from the $9.29 consensus. Despite the revision indicating a more unfavorable outlook for the stock, UBS analysts contend that a substantial portion of this adjustment has already been accounted for in the current share price.
They maintain a long-term perspective, suggesting that Hershey is likely to sustain growth in both sales and profits above the average of its peers, which justifies a premium multiple for the stock. However, in the near term, analysts predict that the company's shares will likely remain within a stagnant price range over the next 12 to 18 months..