Hershey May Seem to Be Melting, but Don't Give Up on the Stock Yet

NEW YORK (TheStreet) -- Shares of global chocolate giant Hershey (HSY)  aren't cheap. At a price-to-earnings ratio of 25, the stock is trading six points higher than its industry average and five points higher than the P/E of the S&P 500 (SPY) , according to CNN Money. And with the stock at $94 on Monday at 1:30 p.m., Hershey investors are down 3.3% year to date, trailing the 7% gain of the S&P 500.

Hershey investors may be left feeling bitter.

But why sell now -- especially since the stock is down almost 9% in the past six months? The optimal selling period is past. Now is the time to hold or even add to an existing long position.

With the stock still carrying a high analyst target price of $118, according to Yahoo! Finance, a better play is to develop a sweet tooth. If that high price target is right, Hershey could still produce gains of more than 25%. Even the mean analyst price target and median price target suggest gains of 10% and 8%, respectively.

Given the weak performance of the packaged food industry, it's easy to get discouraged. Bears are quick to point out that peers like Mondelez (MDLZ) and Nestle (NSRGY) are trading at much cheaper valuations, with P/Es of 16 and 23, respectively.

But that's not really a fair comparison.

With the industry still struggling from weak prices and compressed margins, Hershey is the only one among the three that's actually growing its revenue. In the most recent quarter, revenue climbed 5% year over year, compared to 2% and 5% declines for Mondelez and Nestle, respectively. And Hershey outperforms both companies in operating margin, besting Mondelez by six points and Nestle by four points. And it looks as if the margin gap is about to get wider.

David Driscoll, analyst at Citigroup doesn't agree with how the market is treating Hershey, and believes these shares are poised for a comeback. While the company has struggled with higher costs for ingredients and weak demand, Driscoll expects Hershey's revenue to double in the second half of the year. (He also cited candy demand for Halloween.) Even better, Driscoll expects the company's margins to fatten up.

That's because Hershey has hiked its prices by 8%. The company felt it had to do this to protect its margins at the beginning of the year. Though there were concerns that the price hike would impact revenue, that hasn't been the case. At 5% year-over-year revenue growth, Hershey is still hitting its long-term range of 5% to 7%.

Driscoll, who has a $112 price target on the shares, doesn't believe the price increase will hurt sales. There's precedent for this: the last two times Hershey raised its prices, in 2008 and 2012, the company suffered no significant declines.

In this case, the higher prices coupled with Driscoll's expected rise in revenue can only mean one thing -- higher profits.

They say life is like a box of chocolates: you never know what you're going to get. That's not true with Hershey. Investors can expect a higher stock price. And with the company's strong dividend of 2.3%, it pays to wait for that chocolate delivery to arrive.

At the time of publication, the author held no position in any of the stocks mentioned.

Follow @Richard_WSPB

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates HERSHEY CO as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate HERSHEY CO (HSY) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, increase in net income, expanding profit margins and notable return on equity. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

You can view the full analysis from the report here: HSY Ratings Report

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