In May 2023, The Hershey Company (NYSE: HSY) launched a limited edition churro-flavored Kit Kat just in time for summer. Since then, approximately 10% has been trimmed from the leading U.S. confectioner’s share price. 

Give me a break!

The new Kit Kat rollout has had nothing to do with Hershey’s uncharacteristic slide. In fact, nothing has. Nothing has changed since the company’s beat and raised first quarter report. Given the investment’s impressive track record of defensive growth, this makes the recent correction a great time for investors to break themselves off a piece of Hershey's stock.

Over the last 15 years, Hershey’s stock has produced a 14.8% annualized total return, well outpacing the broader U.S. market which has returned 11.0%. It has lagged in recent months while the S&P 500 has climbed to fresh 2023 highs, a reflection of traders’ appetites for riskier technology and consumer discretionary names. Periods like these, however, have historically been a good time to snack on the long-term outperformer — especially after a strong quarterly report.

Hershey’s Q1 earnings per share (EPS) rose 17% year-over-year and handily topped Wall Street’s expectation for the 11th consecutive time. The beat was the result of increases in both demand and pricing as shoppers continued to show a willingness to pay more for their favorite chocolate and snack brands. Improving supply chain efficiencies also contributed to a 1.2% jump in the operating profit margin. 

In response to the strong start to the year, management raised its 2023 sales growth and EPS growth forecasts to 8% and 15%, respectively. Both figures are at the high end of previous guidance. 

Heading into its July 27th second-quarter report, Hershey appears to be in the sweet spot for another consensus-topping performance. Analysts’ 6% EPS growth projection could get crunched yet again.

What Is Hershey’s Growth Strategy?

A day before the churro Kit Kat launch, Hershey held its annual shareholder meeting. Chairman & CEO Michele Buck highlighted the company’s 12.3% five-year EPS growth rate, which is more than four times that of the average S&P food manufacturer.

To build off this performance, Hershey’s plans to tap into a familiar playbook that starts with leaning on one of the snacking industry’s strongest brand portfolios — Reese’s, Twizzlers and Jolly Ranchers, to name a few.

Salty snacks remain a key part of the growth strategy. As workers return to offices and hop back into cars and planes for business trips, bags of pretzels and chips have been in increasing demand. Hershey’s is capitalizing on not only this trend but also growing interest in ‘better-for-you’ snacks.

Fast-growing products like Skinny Pop popcorn and Dot’s homestyle pretzels are satisfying the munchies for on-the-go and work-from-home consumers alike. Healthier sweet-tooth offerings like Hershey’s zero-sugar chocolates are also resonating with health-minded Americans. 

Profitable international expansion is another pillar of the growth plan. In Q1, international sales grew 19%, outpacing overall growth. Even better news for investors — markets outside North America account for less than 10% of the business. This means Hershey’s has a fast-growing segment with tons of room for growth. In the near term, Australia, Germany and the Middle East are in the crosshairs for overseas expansion. 

What Is the Potential Upside for Hershey Stock?

Hershey shares are trading at 25x this year’s earnings estimate, which is on par with its five-year historical average — and the average food products industry P/E ratio. Looking out to 2024, the stock goes for a slightly less expensive 23x. Both P/E’s suggest little room for multiple expansions to the stock’s average valuation.

Keep in mind, however, that 25x is simply an average. Hershey’s P/E has swung into the low 30s in recent years as investors have sought out the consumer staples stock’s relative safety. When the broader U.S. stock market experiences the inevitable pullback from its current hot streak, a rotation back to defensive names could push Hershey’s P/E back to 30x. If it gets there, this would imply 20% upside from current levels.

And that’s exclusive of the dividend. Hershey’s P/E expansion of 20% plus a 1.7% dividend yield could produce a tasty return over the next 12 months. For a stock that’s delivered a 15% return over the last 15 years, this seems like a realistic ‘Payday.’