Hershey's 2025 Results Confirm Margin Squeeze; 2026 Outlook Key to Overvalued Stock

What happened

Hershey announced its fourth-quarter and full-year 2025 financial results and provided an initial outlook for 2026, following a year of severe margin compression from cocoa, sugar, labor, and tariff shocks. The DeepValue report highlights that despite management's pricing and productivity efforts under new CEO Kirk Tanner, gross margins have fallen sharply, with a 650–700 basis point compression expected in 2025. While the 2026 outlook may hint at recovery as cocoa prices ease from peaks, the stock trades at ~$188, approximately 45% above intrinsic value, pricing in an optimistic rebound. Investors must look beyond the PR's positive spin to assess volume trends and competitive pressures, which could undermine the earnings recovery narrative. Critical scrutiny is needed on whether margin normalization is cyclical or structural, given ongoing regulatory and ESG risks.

Implication

The announcement reinforces that Hershey's margins are at cyclical troughs, but the stock's premium multiple of ~28x EPS already discounts a robust recovery, leaving little room for error. Investors should monitor the 2026 guidance closely for signs of gross margin improvement relative to input costs, as failure to rebound could trigger multiple compression. Salty snack growth offers diversification, but integration risks from acquisitions like LesserEvil and potential volume erosion in confectionery add uncertainty. A prudent approach is to wait for the stock to trade closer to the ~$130 DCF anchor or for sustained margin recovery evidence before considering a buy. Any deviation from management's assumed cocoa normalization or productivity savings could expose downside risks, justifying the 'WAIT' stance.

Thesis delta

The DeepValue report's 'WAIT' thesis remains intact, as Hershey's overvaluation and margin pressures persist despite the new financial results. The 2026 outlook provides incremental data but does not shift the core assessment; investors should still await either a better entry price or confirmation of structural margin recovery. If upcoming quarters show faster-than-expected normalization, a reassessment towards 'POTENTIAL BUY' may be warranted, but current levels lack sufficient margin of safety.