While the broader stock market has raced to new highs lately, Hershey (NYSE: HSY) has left investors with a bitter taste in their mouths. After hitting a peak near $260 early last year, shares of the chocolate and snack giant have melted down nearly 35% to around $170.
But just as a Reese’s Peanut Butter Cup is more than its chocolate shell, there’s more to this story than the stock price suggests.
Let’s run the stock through The Value Meter to find out whether this pullback offers a sweet opportunity.
First, let’s look at Hershey’s enterprise value-to-net asset value (EV/NAV) ratio, which tells us how much investors are theoretically paying for the company’s assets. With an EV/NAV of 9.7, Hershey is over 50% more expensive than the average company.
Though that might raise eyebrows, focusing solely on this metric could cause us to miss the potential richness inside.
The real story here is Hershey’s remarkable ability to generate cash. The company has churned out positive free cash flow in each of the past four quarters. Its free cash flow averaged 10.1% of its net assets during this period, which is well above the 7.8% average among its peers.
This cash-generating prowess isn’t magic – it stems from Hershey’s dominant market position and pricing power.
Despite challenging conditions, Hershey’s free cash flow surged more than 90% to $567 million last quarter. The company also generated $3 billion in net sales (buoyed by 0.8% growth in its core North America Confectionery segment) and earned about $654 million in adjusted operating profits.
Now, Hershey does face some difficulties. Cocoa prices have surged to record highs, which has pressured input costs, and the company has also been forced to adapt its portfolio to evolving consumer preferences, particularly in “better-for-you” snacking.
However, Hershey brings several advantages to these challenges, having successfully navigated numerous commodity cycles during its 130-year history. The company’s recent expansion into salty snacks, highlighted by Dot’s Homestyle Pretzels’ 31% growth in the third quarter, reduces its reliance on chocolate. More importantly, Hershey’s brands command premium shelf space and pricing, helping maintain healthy 41.3% gross margins even in tough times.
When we weigh Hershey’s valuation against its superior cash generation, strong competitive position, and proven ability to manage difficult cycles, today’s price looks like a bargain. Much like finding a forgotten chocolate bar in your cupboard, patient investors may be in for an unexpected treat.
The Value Meter rates Hershey as “Slightly Undervalued.”
What stock would you like me to run through The Value Meter next? Post the ticker symbol(s) in the comments section below.