3 Reasons Why HSY is a Risky Choice and One Alternative Stock Worth Buying

Hershey’s Recent Performance: A Closer Look

In the last half-year, Hershey’s stock has delivered impressive returns, outperforming the S&P 500 by 15.1%. The share price has risen to $217.99, marking a robust 17.5% gain. This upward movement has been fueled in part by strong quarterly earnings, prompting investors to consider their next steps with the stock.

Why We’re Not Enthusiastic About Hershey

Despite recent gains, we remain skeptical about Hershey’s prospects. Here are three key reasons we’re steering clear of HSY, along with an alternative stock we prefer.

1. Declining Sales Volumes Signal Weakening Demand

Revenue growth in consumer staples is driven by both pricing and the number of units sold. While price increases matter, volume is critical since consumers can switch to generic brands if prices climb too high. Over the past two years, Hershey’s average quarterly sales volume has dropped by 1.2%. This is concerning, as demand for staple products is usually steady.

Hershey Year-On-Year Volume Growth

2. Operating Margins Are Under Pressure

Operating margin measures how much profit remains after covering core expenses like production, marketing, and payroll. It’s a useful metric for comparing profitability across companies, as it excludes interest and taxes. Hershey’s operating margin has fallen by 13.5 percentage points in the past year, raising concerns about rising costs. Despite revenue growth, the company hasn’t benefited from greater efficiency. Its operating margin over the last twelve months stands at 12.3%.

Hershey Trailing 12-Month Operating Margin (GAAP)

3. Earnings Per Share Are Falling

Tracking earnings per share (EPS) over time reveals whether a company’s growth is translating into real profits. Unfortunately, Hershey’s EPS has declined by an average of 9.5% per year over the last three years, even as revenue increased by 3.9%. This suggests the company is becoming less profitable for shareholders as it expands.

Hershey Trailing 12-Month EPS (Non-GAAP)

Our Verdict

Ultimately, Hershey doesn’t meet our standards for business quality. Although the stock has recently outperformed the broader market and is trading at a forward P/E of 25.9 (or $217.99 per share), we believe the risks outweigh the potential rewards. While some investors may be comfortable with this risk, we see better opportunities elsewhere. For example, consider a leading Aerospace company with a proven M&A track record.

Stocks We Prefer Over Hershey

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