Hershey Reports Q4 Sales Growth Amid Cocoa Inflation, but Margin and Valuation Concerns Persist

What happened

Hershey reported fourth-quarter and full-year 2025 results, highlighting continued sales growth despite what management called "unprecedented cocoa inflation" and broader macro volatility. The company emphasized its ability to navigate input cost pressures through pricing and mix, while outlining a 2026 plan centered on accelerating growth, restoring margins, and increasing investment in brands and capabilities. However, the DeepValue master report notes severe gross margin compression of 650-700 basis points in 2025 due to cocoa, sugar, labor, and tariff shocks, with the stock trading at ~$188, approximately 45% above a conservative DCF anchor, indicating overvaluation. Hershey's strategic initiatives, including productivity programs and diversification into salty snacks, aim to mitigate cocoa dependence, but execution risks and ongoing commodity volatility challenge near-term recovery. Overall, the company remains a high-quality, cash-generative franchise, but current pricing embeds optimistic assumptions about margin normalization, warranting scrutiny from value-oriented investors.

Implication

The earnings call confirms that Hershey is managing sales growth through pricing, but persistent cocoa inflation and tariff costs continue to compress margins, eroding profitability despite top-line resilience. With the stock trading at a premium valuation of ~28x EPS, any delay in margin normalization or failure to execute the 2026 plan could lead to multiple compression and significant downside risk. Management's focus on restoring margins and investing in brands is a positive step, but success hinges on cocoa price stabilization and effective cost pass-through without sustained volume erosion. Investors should closely monitor quarterly margin trends, volume/share data in confectionery and salty snacks, and progress on productivity initiatives to assess recovery credibility. Until clearer evidence of sustainable margin improvement or a more attractive entry price emerges, the risk/reward skews toward patience, aligning with the DeepValue report's WAIT recommendation.

Thesis delta

The Q4 results and 2026 plan reinforce the existing thesis that Hershey is overvalued relative to its normalized earnings power amid cyclical margin pressures. While sales growth demonstrates brand resilience, the ongoing cocoa inflation and guided margin compression for 2025 validate the cyclical trough, without providing sufficient proof of structural recovery to shift the WAIT stance. Investors should await either a better entry price or more concrete evidence that margins can rebound sustainably beyond transitory factors.