Although Hershey (currently trading at $188 per share) has gained 12.3% over the last six months, it has trailed the S&P 500’s 27.3% return during that period. This might have investors contemplating their next move.
Is now the time to buy Hershey, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Is Hershey Not Exciting?
We're sitting this one out for now. Here are three reasons why HSY doesn't excite us and a stock we'd rather own.
1. Demand Slipping as Sales Volumes Decline
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
Hershey’s average quarterly sales volumes have shrunk by 1.4% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable. 
2. Shrinking Operating Margin
Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.
Looking at the trend in its profitability, Hershey’s operating margin decreased by 4.4 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 18.7%.
3. EPS Growth Has Stalled
We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Hershey’s flat EPS over the last three years was below its 5.1% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Hershey isn’t a terrible business, but it doesn’t pass our quality test. With its shares underperforming the market lately, the stock trades at 32.4× forward P/E (or $188 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d recommend looking at one of our all-time favorite software stocks.
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