The Hershey Company: Will it sweeten your portfolio?

The Hershey Company is a market leader in the confectionery and snacking industry, known for its iconic chocolate brands and expanding salty snack portfolio. With a strong moat built on brand strength, pricing power, and an efficient supply chain, Hershey has maintained a dominant position in North America while strategically expanding internationally. Through innovation in both indulgent and better-for-you snacking, the company is adapting to evolving consumer preferences. The question remains: Should this sweet and salty giant have a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do own shares in The Hershey Company. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. If you want to purchase shares (or fractional shares) of The Hershey Company, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

The Hershey Company, founded in 1894 in Pennsylvania, USA, has grown into a leading multinational confectionery and snack food manufacturer. It is the largest producer of chocolate in North America and one of the world’s biggest chocolate manufacturers. While best known for its chocolate brands, the company has expanded into salty snacks, beverages, and baked goods, selling over 100 brands in approximately 80 countries. Hershey operates through three main segments. North America Confectionery, which remains its largest business, contributes 81% of total sales and includes chocolate and non-chocolate confectionery, gum, protein bars, snack bites, spreads, and pantry items. Some of the company’s most well-known brands, such as Hershey’s, Reese’s, Kisses, Jolly Rancher, Kit Kat (U.S.), Twizzlers, and Ice Breakers, fall under this segment. It also includes retail operations such as Hershey’s Chocolate World stores and brand licensing. The North America Salty Snacks segment, which accounts for 10% of sales, includes ready-to-eat popcorn, baked snacks, and pretzels under brands like SkinnyPop, Pirate’s Booty, and Dot’s Homestyle Pretzels, reflecting Hershey’s strategic expansion beyond confectionery. The International segment, contributing 9% of sales, includes operations across Latin America, Asia, the Middle East, Europe, and Africa, with localized brands such as Pelon Pelo Rico in Mexico, IO-IO snacks in Brazil, and Sofit beverages in India. Hershey’s strong moat is built on brand strength, pricing power, and an efficient supply chain that ensures consistent demand, high margins, and scalability. Its portfolio includes some of the most recognizable and beloved chocolate brands, creating deep emotional connections with consumers. This loyalty helps Hershey maintain strong pricing power and demand, even in weaker economic conditions. The company’s vast distribution network and close relationships with major retailers and wholesale distributors ensure prominent shelf space and seamless product availability across grocery stores, mass merchandisers, convenience stores, and specialty retail outlets. Beyond its core confectionery business, Hershey’s expansion into salty snacks and better-for-you options reinforces its presence in the broader snack market. By acquiring high-growth brands in these categories, the company has diversified its revenue streams and reduced reliance on traditional confectionery sales.

Management

Michele Buck has served as CEO of The Hershey Company since 2017, leading the company through a period of strong growth and strategic expansion. She joined The Hershey Company in 2005 and held multiple leadership roles before assuming the top position. Prior to joining the company, Michele Buck held various roles at Kraft/Nabisco and the Frito-Lay division of PepsiCo, gaining extensive experience in consumer goods and brand management. She holds a bachelor’s degree from Shippensburg University and an MBA from the University of North Carolina. Michele Buck has been recognized for her leadership and strategic vision, earning a place on Fortune's Most Powerful Women list every year from 2017 to 2021 and again in 2023. One of her key achievements as CEO has been diversifying The Hershey Company’s portfolio beyond confectionery by expanding into the salty snacks market. Under her leadership, the company has made several acquisitions, including SkinnyPop, Pirate’s Booty, and Dot’s Homestyle Pretzels, strengthening its position as a broader snacking powerhouse. She is known for her energetic leadership style and prefers to define CEO as "Chief Energy Officer," emphasizing her role in inspiring employees and driving the company’s success. This approach appears to resonate well, as she holds a Comparably employee rating of 76/100, placing her in the top 15% of CEOs at similarly sized companies. After nearly two decades with The Hershey Company, Michele Buck has announced her intention to retire in 2026. She has stated that she remains fully focused on delivering the company’s 2025 goals and advancing its long-term strategy before passing the torch to the next generation of leadership. The company’s board has already initiated a formal search process to identify a successor who can continue executing its strategic vision. While Michele Buck’s leadership has played a pivotal role in The Hershey Company’s success, her upcoming retirement introduces some uncertainty regarding the company’s future management and direction, making the selection of her successor a crucial decision for Hershey’s long-term growth.

The Numbers

The first number we will investigate is the return on invested capital, also known as ROIC. We require a 10-year history with all figures exceeding 10% for each year. These numbers are certainly encouraging, as The Hershey Company has maintained a ROIC above 20% every year for the past decade. Management has emphasized its commitment to being "good stewards of the great cash this business generates" by consistently investing in organic growth and mergers and acquisitions that meet specific return thresholds. This disciplined approach has contributed to the company’s ability to sustain a high ROIC over time. Hershey achieved its highest ROIC in a decade in 2024, which is a positive indicator of its capital efficiency. This was partly driven by the AAA initiative, which resulted in significant cost savings, a benefit the company expects to continue into 2025. Given Hershey’s strong historical returns and the ongoing impact of the AAA initiative, I expect ROIC to remain above 20% moving forward.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Equity declined in both 2015 and 2016. However, since 2017, The Hershey Company has consistently increased its equity every year. Not only has equity grown, but it has also increased by more than 10% annually, making Hershey a textbook example of the ideal equity growth trajectory from 2017 onward. Strong equity growth is a positive indicator, as it reflects a company’s ability to generate profits, reinvest in the business, and strengthen its financial position over time, ultimately benefiting long-term shareholders.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising to see that The Hershey Company has consistently generated positive free cash flow every year over the past decade. Free cash flow declined from 2022 to 2023, but this was largely due to record-high capital expenditures, making it less of a concern. In 2024, Hershey reversed this trend and delivered its highest free cash flow ever, which is a very encouraging sign. The company has outlined clear capital allocation priorities, including reinvestment for growth, mergers and acquisitions, a dividend payout ratio of at least 50%, and share repurchases. As free cash flow continues to grow, it should directly benefit shareholders, as Hershey maintains a high return on invested capital, increases dividends, and reduces outstanding shares. Levered free cash flow margin also increased in 2024 but did not reach previous highs. This is largely due to capital expenditures, which, while lower than in 2023, remain elevated compared to 2021 and 2022. The free cash flow yield is currently at its second-highest level in the past decade, suggesting that Hershey’s shares are trading at an attractive valuation. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has a manageable debt level that can be repaid within a three-year period. This is calculated by dividing total long-term debt by earnings. After performing this calculation for Hershey, I found that the company has 1,41 years of earnings in debt. Since this is well below the three-year threshold, debt is not a concern for me if I were to invest in Hershey. Hershey has had periods where its debt exceeded three years of earnings, but when that happens, the company prioritizes debt reduction. As a result, its debt level has not surpassed four years of earnings since 2015. Given this disciplined approach to debt management, I do not expect it to be a significant issue for Hershey in the future.

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Risks

Competition poses a significant risk to The Hershey Company due to the highly competitive nature of the confectionery and salty snacks markets. The company competes against global multinational corporations, national and regional firms, private-label brands, and large retailers with substantial resources and international reach. Market share in this industry is driven by factors such as product innovation, quality, pricing, brand recognition, marketing effectiveness, consumer preferences, and retail positioning. One major challenge Hershey faces is the increasing focus on innovation among high-quality chocolate manufacturers. Management has acknowledged that competitors are investing more in product development, which may require Hershey to continuously introduce new products to maintain its competitive edge. If the company fails to keep up with evolving consumer tastes and product trends, it risks losing market share to more innovative rivals. Another competitive risk comes from private-label brands, particularly during periods of economic downturn. Consumers may opt for lower-priced alternatives, leading to increased market penetration for private-label confectionery and salty snacks. Management has already observed rising private-label sales in both categories due to the current economic environment, which could further pressure Hershey’s pricing power and margins. The broader snack industry has also become more competitive, with an increasing number of alternatives vying for consumer attention. This trend has put pressure on confectionery category growth, requiring Hershey to expand the boundaries of its brands through acquisitions and new product launches. However, introducing and establishing new products carries inherent risks, as there is no guarantee of consumer or trade acceptance. To protect or expand its market share, Hershey may need to increase spending on promotions and advertising. While these efforts can drive brand awareness and sales, they also come with the risk that higher expenditures may not yield the expected return, potentially impacting profitability.

Commodity prices pose a significant risk to The Hershey Company due to its reliance on key raw materials such as cocoa, sugar, dairy products, corn products, wheat products, and nuts. Cocoa and sugar prices are currently at historically high levels, and several factors suggest that these elevated costs may persist, putting pressure on earnings and profitability in 2025 and beyond. One of the primary drivers of rising cocoa prices is the ongoing global drought affecting cocoa production, which has been exacerbated by El Niño, a weather phenomenon that brings hotter and drier conditions to key cocoa-producing regions. With cocoa supply already under strain, prices could continue to rise or remain elevated for an extended period. Similarly, sugar harvests are expected to be negatively affected by extreme weather, keeping sugar prices high for at least another year. Beyond weather-related challenges, market dynamics and geopolitical risks add to commodity price volatility. Cocoa prices have surged since the beginning of 2024, driven by low financial market liquidity, speculative influences, and supply chain disruptions. Additionally, trade agreements, currency fluctuations, inflation, and global conflicts, such as the ongoing Russia-Ukraine war, may further disrupt supply chains and impact pricing. The effects of high commodity prices are already reflected in Hershey’s financial performance. The company expects adjusted gross profit margin to contract by 650 to 700 basis points in 2025, with further margin pressures likely in the second half of the year as cocoa costs continue to rise. Although management believes current cocoa prices do not reflect true market fundamentals and expects eventual stabilization, the short-term impact on earnings remains unavoidable.

Reduced demand for Hershey’s core products presents a significant risk, as evolving consumer preferences, increasing health consciousness, and potential regulatory changes could impact long-term sales growth and profitability. While management has stated that they have not observed any material impact from these trends, they acknowledge a broader consumer shift toward health and wellness, which has been ongoing for some time. Consumers are becoming more mindful of their dietary choices, leading to reduced consumption of traditional confectionery products, particularly those perceived as high in sugar and processed ingredients. If this trend continues, it could have a lasting impact on sales. The potential long-term impact of GLP-1 weight-loss drugs adds another layer of uncertainty. While Hershey’s internal and external data sources, including the Cornell Enumerator studies, suggest that users of these drugs do not disproportionately reduce confectionery consumption, it is still too early to assess the long-term effects. If adoption of these drugs accelerates, it could lead to a structural decline in demand for indulgent, high-calorie snacks and sweets, particularly as consumers adjust their eating habits toward smaller portions or fewer snacks overall. Beyond shifting consumer preferences, regulatory risks could also pose a challenge. Although there is no current indication of government action, it is possible that sugar taxes could be introduced in the future due to growing concerns over the health risks associated with sugar consumption. Several U.S. cities have already implemented sugary drink taxes, and similar measures could be extended to other products, including confectionery. If governments impose additional taxes or stricter regulations on sugar content, it could impact Hershey’s pricing power, margins, and overall demand. Additionally, broader consumer lifestyle shifts could further impact Hershey’s business. Younger generations are showing increased interest in functional foods, plant-based alternatives, and natural ingredients, which may challenge the long-term growth potential of traditional confectionery.

Reasons to invest

Hershey's strong portfolio in both sweet and salty snacks is a compelling reason to invest in the company. While its core chocolate and confectionery brands provide a solid foundation, Hershey’s expansion into salty snacks has strengthened its overall positioning in the growing snacking market. This dual-category leadership enhances its ability to capture a wider range of consumer snacking occasions, reinforcing both brand relevance and long-term revenue stability. Hershey owns some of the most iconic and widely recognized chocolate brands, including Hershey’s, Reese’s, Kisses, Kit Kat (U.S.), Twizzlers, Jolly Rancher, and Ice Breakers, which have built deep emotional connections with consumers over generations. This brand strength translates into high customer loyalty, significant pricing power, and a resilient revenue stream. The company has a dominant share of the U.S. chocolate market, a category known for its consistent demand, strong margins, and impulse-driven purchases. Seasonal demand spikes from events such as Halloween, Valentine’s Day, Easter, and the holiday season further drive incremental sales, ensuring recurring and predictable revenue throughout the year. In recent years, Hershey has leveraged this strong foundation in sweets to build a high-growth salty snack portfolio. Its acquisitions of SkinnyPop and Dot’s Pretzels have been particularly successful, with both brands now ranking among Hershey’s top 10 brands overall. The company’s "disruptor playbook" strategy has helped double or even triple revenues for its acquired brands, demonstrating its ability to scale and expand within the snack food industry. Salty snacks represent an attractive growth segment, with some categories expanding more than 20% annually. Hershey is well-positioned to capitalize on this trend by strengthening distribution, enhancing packaging, and introducing new price pack architectures to cater to various consumer segments. Additionally, the company is innovating by combining its sweet and salty portfolios, as seen with products like Reese’s peanut butter-filled pretzels, which leverage the brand equity of both categories.

International expansion presents a significant growth opportunity for The Hershey Company, as its global presence currently accounts for only a small portion of total sales. This leaves substantial room for growth, particularly in markets where chocolate consumption is rising and where Hershey’s brands are gaining traction. While North America remains the company’s primary revenue driver, Hershey has been strategically investing in international markets, focusing on regions with strong long-term potential and opportunities for profitable expansion. One of the company’s biggest opportunities lies in expanding Reese’s as a global brand. Already the number one brand in the U.S., Hershey is leveraging its successful U.S. playbook to drive international growth. Reese’s has seen double-digit growth across global markets, supported by strong distribution and retail execution. The brand has gained significant momentum in the UK and Germany, where portfolio expansion and growing consumer acceptance have fueled rapid growth. Hershey is now working to extend Reese’s into additional markets such as Mexico and other parts of Europe, capitalizing on the increasing global demand for peanut butter-based products. Hershey’s long-term international strategy prioritizes measured investment and disciplined market entry. The company has made deliberate choices about where to expand, exiting markets like China where profitability proved challenging while doubling down on regions with stronger potential. Its low-risk, test-and-learn approach has been evident in the expansion of Reese’s, where Hershey initially introduced the brand through low-level investment, limited advertising, and targeted retail locations before scaling up once consumer demand was validated.

Innovation is a key driver of growth for Hershey and a strong reason to consider investing in the company. Hershey has consistently expanded and evolved its product portfolio through new flavors, textures, packaging, and better-for-you options, ensuring it remains relevant in a rapidly changing snacking landscape. The company’s innovation efforts focus on two major areas: expanding its sweets portfolio and strengthening its presence in the health-conscious snacking segment. Hershey’s sweets category has become a significant growth area, now nearing $1 billion in revenue with a 7% compound annual growth rate. The company has identified sweets as a key pillar for future growth, as evolving consumer palates drive demand for new taste experiences, textures, and flavors. Historically, sweets were primarily consumed by children, but consumption trends now show that adults are indulging more than previous generations, providing Hershey with a larger addressable market. The company has seen strong success with new product launches, including Jolly Rancher innovations, Shaq-a-licious Gummies, and the acquisition of Sour Strips, a high-growth brand that expands Hershey’s presence in the segment. Beyond indulgent sweets, Hershey is expanding into better-for-you snacking, responding to the long-term consumer shift toward health and wellness. The better-for-you snacking category is growing at 12% annually, and Hershey is positioning itself to capture market share in key subcategories such as zero sugar, protein-rich, and clean-label products. The company has prioritized expanding its zero-sugar product line, which has shown strong momentum, and is also focusing on protein-based snacks, reinforcing its commitment to providing both indulgent and functional snacking options. Hershey’s acquisitions of Lily’s low-sugar chocolate and Brookside fruit-based chocolate, along with its investment in research and development and new food technologies, highlight its dedication to building a more diversified, health-conscious portfolio. The recently announced partnership with VitaKey further strengthens Hershey’s innovation pipeline, as the company seeks to develop a suite of functional health and wellness products to meet evolving consumer demands.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 10,92, which is from the year 2024. I have selected a projected future EPS growth rate of 8,5%. Finbox expects EPS to grow by 8,5% in the next five years. Additionally, I have selected a projected future P/E ratio of 17, which is double the growth rate. This decision is based on Hershey's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $103,75. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy The Hershey Company at a price of $51,88 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 2.532, and capital expenditures were 606. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 424 in our calculations. The tax provision was 253. We have 202,4 outstanding shares. Hence, the calculation will be as follows: (2.532 – 424 + 253) / 202,4 x 10 = $116,65 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With The Hershey Company's Free Cash Flow Per Share at $9,52 and a growth rate of 8,5%, if you want to recoup your investment in 8 years, the Payback Time price is $111,87.

Conclusion

I believe that The Hershey Company is a great business with a significant moat driven by brand strength, pricing power, and an efficient supply chain. Management has done an excellent job, but with the current CEO set to retire soon, there is some uncertainty regarding leadership. Hershey has consistently delivered a high return on invested capital above 20% over the past decade, reaching its highest level in 2024, which is encouraging. The company also generated its highest free cash flow ever in 2024, and while the levered free cash flow margin has not returned to previous highs, this is due to higher capital expenditures aimed at long-term growth, making it less concerning. Competition remains a risk, as Hershey faces pressure from global brands and private labels, requiring ongoing innovation and marketing investment to defend its market share and profitability. Additionally, commodity prices pose a challenge, with historically high cocoa and sugar costs driven by weather disruptions, supply chain volatility, and geopolitical factors, leading to expected margin contraction in 2025. Changing consumer preferences present another risk, as health-conscious trends, potential sugar regulations, and the rise of GLP-1 weight-loss drugs could weaken long-term demand for Hershey’s core products. However, the company’s strong portfolio in both sweet and salty snacks provides diversification, balancing the stability of its iconic confectionery brands with the high-growth potential of salty snacks, ensuring brand relevance, expanded consumer reach, and long-term revenue stability. Hershey’s international expansion presents another significant growth opportunity, as it currently generates only a small portion of sales from global markets. By leveraging its successful U.S. playbook and taking a measured, strategic approach, Hershey is well-positioned to capitalize on rising demand in high-potential regions. Additionally, Hershey’s commitment to innovation, from new sweets to healthier snacking options, ensures that its portfolio remains relevant as consumer preferences evolve. I believe The Hershey Company is a great investment, and I purchased shares at $163, a 30% discount to the Ten Cap price. I am confident that this entry level will provide strong long-term returns.

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