That is the overwhelming consensus of Wall Street. Less than 20% of analysts covering the iconic candy company rate the shares a Buy, far lower than the 55% average for stocks in the Dow Jones Industrial Average.
Still, Hershey (ticker: HSY) stock rose about 3% on Wednesday after Goldman Sachs analyst Jason English upgraded the stock to Hold from Sell, in part because candy prices will rise this Halloween. He has a $142 price target on shares that were trading at $144.94 Wednesday afternoon.
“We have confirmed with industry sources and [Hershey] management that Mars has announced a 9% to 9.5% price increase on single-serve chocolate,” English wrote in a Wednesday research report. He said Mars is also following Hershey’s plan to raise seasonal chocolate prices for the coming Halloween season.
It may be too early to think about costumes, but it isn’t too early to think about the impact higher pricing has on shares of candy companies.
Candy prices are relatively “inelastic,” which is a fancy way of saying a chocolate bar that cost a nickel more than it did yesterday still gets eaten. That gives candy companies pricing power—one reason legendary investor Warren Buffett often sings the praises of his See’s Candy unit at Berkshire Hathaway ’s (BRK.B) annual meetings.
“We put $25 million in [buying See’s], it’s given us over $2 billion of pretax income,” Buffett reflected in May. “We were very fortunate. I would have blown the chance to buy See’s Candy, but Charlie [Munger] said don’t be so cheap.”
Maybe Wall Street could use a Munger-like figure. Analysts today balk at the prices paid for Hershey’s stock.
“We are Neutral [Hershey] shares because we do not think the valuation—23 times next 12 month [earnings]—is fully justified by low single-digit organic top line growth,” JPMorgan analyst Ken Goldman said in a Tuesday research report.
Goldman sees more value in other food stocks. For instance, food companies in the S&P 500 trade for about 16 times next year’s estimated earnings, and consumer staples stocks trade for 19 times estimated earnings.
The counterargument that bullish investors (or Warren Buffett) may offer Wall Street analysts is that Hershey always trades for a premium valuation multiple. In fact, today’s premium looks just like historical averages.
Part of Hershey’s premium is attributable to endless speculation that the company could be sold. Hershey is controlled by Hershey Trust, established by Milton Hershey, which holds stock representing 80% of available votes. That means that, to buy the entire company, there is really only one shareholder to persuade. The last transaction reported on was a Mondelez (MDLZ) attempt to buy Hershey in 2016 for $25 billion, including net debt.
Minority Hershey shareholders are probably glad that didn’t happen, because the Hershey enterprise is worth about $34 billion today, up more than 36%. Hershey stock has returned about 12% a year on average since that deal fell through, a little lower than the 16% average annual gain of the Dow over the same span.
The lagging performance just shows that investors can’t pay any multiple of earnings and expect to make acceptable returns. But even if Hershey stock is expensive, it isn’t likely to burn investors. The value of candy franchises over time have been too stable for that.