This is why the pastry chef deserves a place on your bear market watchlist
As investors look forward to the second quarter earnings season, they should look closely at The Hershey Company (NYSE: HSY†† The company could be in for a pleasant surprise when it reports earnings in early August. The first reason for my optimism is the recent news that a federal judge in Washington DC has dismissed a child slavery lawsuit that named Hershey’s as a defendant.
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Putting that story behind it helps investors focus on the second piece of news that may be contributing more directly to their bottom line. Earlier this year, the company announced a weighted average price increase of 14%. This includes a 17% increase on iconic Hershey bars and a 13% increase on the king size version of its products.
A hedge against inflation
The playbook for investing in this bear market can be as simple as finding companies with pricing power. These are the companies likely to continue to deliver solid revenues and profits, no matter how messy the macro picture looks. Based on the company’s April earnings report, it has no problem passing prices on to its customers.
In the most recent quarter, the company posted a 16% year-over-year revenue increase (YOY) and a 31% year-over-year profit increase. And in the past 12 months, the company has realized a profit increase of 18% YOY.
The basics look solid
The company also generated an impressive 28% YOY increase in free cash flow (FCF) between 2020 and 2021. And the $1.59 billion in FCF the company posted in 2021 surpassed pre-pandemic 2019 by 10%.
As both sales and earnings are set to grow steadily over the next five years, the company should continue to generate strong free cash flow that may alleviate concerns some investors have about the company’s debt-to-GDP ratio, which is somewhat high compared to other companies in the US. sector.
And while there are better options available to pure dividend investors, the fact that the company has a strong cash position means its current dividend (which has risen 13 consecutive years) isn’t compromised.
A sweet 5-year trend
HSY stocks have shown strong five-year growth. If an investor bought shares on June 28, 2017, he received a 104% increase in price. And their total returns will be higher if they reinvest the company’s dividend, which has been increased by Hershey in each of the past 13 years.
And for the “what have you been doing for me lately” crowd, there are two pieces of good news. Over the past 12 months, HSY’s stock has risen by 27%. And in 2022, the share is up 13.6%. And even in the volatile period in stocks since Memorial Day, Hershey’s stock is up 4%.
This shows that Hershey’s has a story beyond just being a pandemic winner. Consumers still find comfort in the company’s products. And that is likely to continue into the second half of the year, with two of the company’s strongest periods of demand.
In a bear market it is important to see the forest for the trees. It’s no time to buy haphazardly. But if you’re looking for quality companies with price power and products that will be in high demand, you’re in the right place.
That said, the analysts followed by MarketBeat suggest that the price of the HSY stock has reached its peak. However, the most recent price targets are above consensus. Analysts are expected to lower their price targets and ratings during this earnings season. That may be true, but if Hershey’s continues to deliver strong results, the stock could be hard to ignore.
I admit I slept on Hershey’s stash, but I’m wide awake now. It’s on my watchlist and I suggest you keep it on yours. In a sour market, we could all use a taste of something sweet.
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