Cocoa Crash Drives Hershey Margin Recovery, But Valuation Still Demands Patience

What happened

Cocoa spot prices have crashed 74% from their December 2024 peak to $3,333 per ton, with futures through September 2027 flat in the $3,200-$3,600 range, signaling no imminent second spike. Hershey's Q2 2025 was the margin trough at a 30.5% gross margin and $0.31 EPS, but Q4 2025 has already recovered to roughly 38% gross margin and $1.57 EPS, validating the recovery narrative. The company resumed its dividend with a 6% hike in February 2026 after freezing it in 2025, with free cash flow covering dividends 1.6x, indicating financial health is intact. Despite these positive developments, the stock trades near $188 at ~28x earnings and approximately 45% above a conservative DCF intrinsic value of $129, leaving a thin margin of safety. For long-term investors, the franchise quality is undeniable, but the current price already discounts a successful normalization, so patience remains warranted for a more attractive entry.

Implication

Hershey's dominant brands and improving cost environment support a gradual earnings recovery, but the stock's premium valuation leaves limited upside without a further pullback. The resumed dividend hike signals management confidence, yet the risk/reward skews unfavorable at current levels. Investors should monitor volume elasticity and cocoa price stability to gauge if margin recaptures are sustainable. A correction to the $150s or clearer proof of structural margin improvement could shift the stance to BUY. For now, the prudent action is to hold or wait.

Thesis delta

The sharp cocoa decline and rapid margin recovery in Q4 2025 confirm that Hershey's earnings trough is behind it, but the stock's 28x PE already prices in this recovery. The thesis shifts from 'wait for trough' to 'wait for valuation to moderate or for margins to exceed expectations'.