Hershey's Cocoa Relief Fuels Recovery Hopes, But Valuation Looks Overheated

What happened

Cocoa and sugar spot prices have moderated, offering Hershey cost relief and a path to margin recovery after severe compression. The company has set FY2026 adjusted EPS guidance at $8.36, a 32.4% year-over-year jump, underscoring management's confidence in earnings rebound. A recent 6% dividend hike signals improved cash flow and shareholder returns, adding to the bullish narrative. However, the stock has rallied double-digits from recent lows, now trading at a forward P/E of 28x, which is about 45% above a conservative DCF intrinsic value estimate. This overvaluation suggests the market has already priced in a robust recovery, leaving minimal margin of safety as margins remain near cyclical troughs.

Implication

The easing of cocoa and sugar costs provides a tangible tailwind for Hershey's margins, but this positive development is already fully discounted in the current stock price. At a forward P/E of 28x and 45% above intrinsic value, the risk-reward is skewed unfavorably, with limited room for error if recovery falters. Investors must scrutinize whether the guided EPS growth materializes and if volume trends withstand past price hikes without lasting share erosion. Any shortfall in margin normalization or emerging headwinds like regulatory costs could trigger significant multiple compression. Thus, a cautious stance is warranted until either the valuation aligns more closely with fundamentals or execution delivers sustained improvements beyond current expectations.

Thesis delta

The new article does not alter the core 'WAIT' thesis from the DeepValue report, as it confirms recovery prospects but underscores overvaluation after the rally. It reinforces the need for patience, emphasizing that while fundamentals may improve, the stock's premium pricing leaves little margin of safety for value-oriented investors.