They say to never try and catch a falling knife when investing. That’s probably good advice. But when you see a company with as much nostalgia and brand recognition as Hershey’s get cut in half over the last two years, it’s at least worth a second look.

Let’s review some of the popular narratives affecting the stock: GLP-1 weight-loss drugs are reducing demand for junk food, inflation-sensitive consumers are trading down to cheaper private-label treats, and global shortages of cocoa show no sign of letting up.

With that backdrop pinching both supply and demand, it’s little surprise the stock is so beaten down. Yet, the questions are: How enduring are these headwinds to investors focused on the long-term, and is the stock finally at an attractive valuation?

Let’s explore 🍫

— Shawn & Daniel

Reese’s, Twizzlers, Kit Kats, Milk Duds, and, of course, Hershey’s Kisses, those are just a sampling of the iconic snack brands owned by The Hershey Company, ticker: HSY.

Sweet treats are an enduring part of the human experience, and few companies have as strong brand recognition as Hershey. Recalling the feelings of biting into a Hershey Bar or Reese’s Cup as a kid on Halloween will forever bias me (Shawn) toward these products when standing in line at the store, tempted by an impulse purchase of chocolate divinity and sugary splendor.

I literally have a jar of Hershey’s Kisses sitting on the table next to me as I write (and, mysteriously, the contents of said jar are fast disappearing.)

Yet, Americans’ preferences are changing, and to the chagrin of Hershey shareholders, there’s nothing financial markets hate more than uncertainty.

Childhood obesity and the obesity epidemic more broadly pushed customers away from sugary snacks, leading Hershey’s to respond by diversifying into sugar-free chocolates with its Lily’s brand and into salty snacks like Dot’s Pretzels and Skinny Pop Popcorn in the late 2010s/early 2020s.

Still, the company’s core focus remains chocolate, either through sales of its flagship Hershey’s brand (with Kisses and Bars), Reese’s, or KitKats. As such, its fortunes remain closely tied to Americans’ propensity to consume candy, which, as mentioned, is quickly changing.

It’s believed that roughly 1-in-8 Americans have taken or are taking GLP-1 drugs like Ozempic for diabetes, heart disease, or weight loss. Many in this cohort were the largest consumers of products from companies like Hershey’s, and as they make drastic lifestyle and health changes, the concern has been that they will, well, eat fewer Hershey’s Bars and Reese’s Cups. And those concerns have only magnified after these drugs became increasingly mainstream for weight-loss purposes in 2023.

Obviously, I’m not a doctor, but a few thoughts:

My understanding is that GLP-1 drugs do not offer permanent weight loss, so unless people are going to take them indefinitely, there’s a reasonable chance these drugs don’t have a lasting impact on health trends (there are some studies, however, suggesting these drugs can rewire people’s cravings.)

Secondly, these drugs can have serious side effects, and if people are going to take them indefinitely, that increases the risk of side effects, which could reduce their popularity.

And thirdly, people taking GLP-1 drugs specifically for weight loss are seemingly looking for a miracle drug to help, but that doesn’t necessarily mean they want to change their consumption habits. They might ~literally~ want to have their cake and eat it, too. If anything, they might feel liberated to consume more of their favorite snacks.

The point being, even though GLP-1 drugs are seen as a paradigm-shifting threat to snacking companies, there’s good reason to be skeptical about this narrative in the short-to-intermediate term. I hesitate to say long-term because I suspect pharmaceutical companies are dumping money into funding new and improved next-gen versions of these drugs — see below.

Hershey’s management has been skeptical, too, acknowledging GLP-1 drugs have had some impact on sales, but any weakness in demand for their products has reportedly had much more to do with price-sensitive consumers trading down to private-label snack brands after years of high inflation.

Nonetheless, we can’t dismiss this phenomenon entirely. More than 60% of patients taking GLP-1 drugs apparently drank fewer sugary drinks, with one in five quitting sugary drinks entirely, according to Definitive Healthcare. Again, I’m skeptical about the durability of such trends, but if this is emblematic at all of snacking habits, then it’s worrisome for Hershey.

Other companies like Nestlé and Walmart have highlighted how GLP-1 drugs are materially changing the product mix that customers demand, on top of, as mentioned already, some limited early evidence suggesting GLP-1 drugs can have more lasting effects on food cravings by altering brain chemistry.

Here are some findings from a PWC survey of 3,000 GLP-1 patients:

So, Hershey’s may be facing a new reality where, instead of organic sales volumes growing slowly but steadily each year with population growth in North America, they could now face chronically declining demand for their products, which they’ll have to address with either further price hikes or by diversifying into products less sensitive to GLP-1 trends.

On that front, Hershey’s acquisitions of Skinny Pop, Dot’s, and Lily’s look prescient.

Setting aside the mixed bag that is GLP-1 drugs and price-sensitive consumers, what has very tangibly weighed on the stock is cocoa prices. Cocoa tends to be produced in what you might call “sensitive” areas. Sensitive in their vulnerability to climate change, but also poverty, conflict, and even child labor.

This is a recipe for supply chains that are anything but stable, and when you layer in recurring disease outbreaks that have wiped out cocoa trees globally, you get surging cocoa prices. In February 2025, prices for cocoa were 5x higher than in 2022.

Hershey’s is doing what it can. Namely, that means vacuuming up as much supply as possible and using futures contracts to hedge the company’s exposure to cocoa prices. This can go a long way toward nerfing temporary swings, but if prices remain sustained for extended periods (as they have), then Hershey’s gross profits feel the pain at a lag.

So, while Hershey’s gross profits remained intact in 2024, this year is when the bottom really drops out. Management has warned investors that gross profit margins could fall by a full seven percentage points, contributing to an expected 40% decline in earnings in 2025.

Minus Covid-era hiccups, Hershey’s gross margins had otherwise been extraordinarily stable and even improving, which is why the surge in costs of goods sold (reducing gross profit margins) is so troubling, especially considering that A) the long-term picture for cocoa production isn’t inspiring and B) Hershey’s fast-rising costs aren’t just tied to cocoa.

On point B: From sugar prices to tariffs and higher employee compensation, a number of factors beyond cocoa will conspire together to reduce Hershey’s gross margins and operating margins in 2025.

Fortunately, in the latest earnings call, management painted a slightly more optimistic picture, suggesting they no longer think shortages of actual cocoa supplies are contributing to record prices but, rather, now, the issue is a lack of liquidity in financial markets trading cocoa.

This is plausible given that, as cocoa prices have doubled, tripled, quadrupled, and more over the last two years, the amount of capital needed to trade cocoa futures contracts has correspondingly risen (aka “margin requirements”), pushing traders out of the market who need to put down considerably more cash to trade the same number of futures contracts as before.

Here’s a line from Hershey’s management discussing last quarter: "We have no concerns about the global physical supply of cocoa. Fundamentals continue to improve with cocoa arrivals in Ivory Coast and Ghana up approximately 30% compared to this time last year.”

Adding, “Historically high cocoa prices, sugar, and other raw material inflation, along with incremental labor inflation, new tariffs, and negative product mix, are expected to more than offset net price realization, supply chain productivity, and incremental savings from our transformation program."

Jargon translation: Higher input costs and customers purchasing lower-margin products (for example, smaller packages of Reese’s to save cost) will overshadow Hershey’s ability to raise prices and efforts to reduce costs elsewhere in its supply chains.

To me, the fact that prices will not rise to offset these factors is a major red flag.

Unless they have a very firm belief that the business will normalize in 2026, this indicates to me that, despite the widespread recognition of their brands, Hershey’s management doesn’t have confidence in their own pricing power. Meaning that they must absorb costs to the detriment of their own margins, as higher prices would cause an even more painful dropoff in sales volumes.

The end result is a brutal 2025. But the stock has already been chopped in half from its peak to account for that, or at least, it had been before a recent post-earnings rally. With such a powerful portfolio of brands, surely the company will bounce back, meaning the stock is attractively priced for patient investors, right? Maybe.

Perhaps there’s hope that Hershey’s can grow internationally to offset challenges in North America? Unfortunately, I wouldn’t be so hopeful. Hershey’s has been around for 130 years, and international sales still make up only a small fraction of its revenues, revealing that candy brands tend to be more regional than global.

Going back to my mention of being biased in favor of Hershey’s after eating their candy as a kid, this perfectly illustrates the dilemma. People’s sweets preferences are closely tied to childhood nostalgia, and each area has its own connections to specific brands.

Just look at Berkshire Hathaway’s See’s Candy. Despite all the free marketing Buffett has given the brand over the years, it hardly has nationwide recognition, let alone international relevance. Beloved on the West Coast, much of the rest of the U.S. has never even heard of it, something I (Shawn) can attest to before learning about the brand from Buffett.

Hershey’s enjoys wonderful recognition across the U.S., but its brands haven’t found the same success when going up against local competitors around the world, where said brands have generations of accrued nostalgia, traditions, and habits supporting their consumption.

There’s a tremendous variance just across state lines:

Based on 2024 earnings per share, Hershey’s trades at a modest 14x earnings. Paired with a 3%+ dividend yield, a steady history of growth and profits, and some of the most beloved brands in the world, I could get quite excited about an investment at today’s prices.

Yet, this is an illusion. While things look great on a trailing basis, the problem is what will come. When adjusting for the more than 40% decline in earnings anticipated in 2025, the company’s valuation is closer to being >25× this year’s earnings.

Suddenly, the stock looks much less cheaply priced for a company facing serious growth challenges on the demand side (price-sensitive consumers, GLP-1 drugs, healthy snacking generally) and massive volatility in cocoa prices on the supply side.

I used two different approaches to try and roughly estimate Hershey’s value per share. Both spit out about $130 per share:

In the “Terminal Value” approach, I just do a basic discounted cash flow exercise, forecasting gross margins and operating margins will return closer to normal levels on average after 2025 while still not returning to the highs seen before cocoa prices went crazy.

I think this is a candid reflection of the fact that 2025 will be an exceptionally bad year, but the business will likely not be permanently impaired either.

So, I tried to estimate the operating profit based on the expected declines in 2025 relative to historic gross and operating margins, and then I did a very rough conversion to net income by multiplying operating profits by 0.75, which is roughly the average rate at which operating profits have converted to net income over the last few years.

I also assume that sales can grow by 3.5% per year on average by 2025 (which honestly could be optimistic) and then calculate a Terminal Value — the present value of future growth beyond 2029, assuming growth is in line with inflation while using an 8% discount rate.

As you can see, this spits out $131 per share, reflecting that even with some normalization in margins and sales growth, the stock isn’t screamingly undervalued after falling precipitously from a price of $275 in May 2023. In fact, the stock is overvalued relative to my target (it currently trades at around $165 per share.) I find terminal value models to be a bit wonky, though useful when dealing with a company as mature as Hershey.

As you can see below, in the second approach, I took my ballpark estimate of 2029 earnings, multiplied that number by a range of plausible “exit” P/E ratios, and then derived a present value share target.

In English, that is to say, I tried to account for a range of outcomes by considering what the stock would be worth today if it traded at various P/Es in 2029, beginning with a 10x multiple and ending with a 26x multiple and including everything in between.

I can’t predict what sentiment around the stock will be or what growth will look like five years from now, so this is my solution: adding higher weights to the P/E multiples I see as more plausible for a mature business like Hershey and lower weights for less plausible ratios (10x is low for a high-quality company like Hershey, whereas 26x is very optimistic for a slow-growing business.)

Again, the price target I get is about $130, signaling to me that the range of possible future outcomes here doesn’t skew favorably toward investors at current prices.

Take my valuation with a grain of salt — it's mainly an exercise to help me think through the business and the range of future outcomes for the company further.

Feel free to download my model here and play with it for yourself to make your own assumptions about sales growth and margins (make sure to click “File” and “Download” to add your own assumptions.)

With that said on valuation, and on top of all the other risks we’ve covered, there are competitive threats that can undermine Hershey’s business. Namely, this comes with private-label brands (aka “store brands”) that offer chocolate bars and other snacks without all the ritzy marketing and packaging at discounted prices.

While private labels capture a small share of the overall snacking and confectionary markets, they can impact Hershey’s business on the margins, as consumers trade down to more cost-effective options to scratch the itch for sweets when their wallets feel a bit stretched.

Additionally, there’s a new entrant on the scene known as Feastables, a chocolate bar product tied to Gen Z icon Mr. Beast — the world’s most famous YouTuber. Normally, I’d say no one could rival the 130+ years of marketing that has gone into Hershey’s brand, but if any new competitor could, it’s probably Mr. Beast.

Chocolate is not his core focus by any means, but his bars are immensely popular with the younger generation, and with hundreds of millions of YouTube subscribers, he has an organic audience size that companies could only dream of recreating with paid advertising.

On the margins, I expect this will continue to weigh on demand for Hershey’s products in an already tough environment, and longer term, it could be a serious risk for the brand if Gen Z and Gen Alpha remain loyal to Feastables.

On top of all this, I should mention that Mars is one of Hershey’s closest competitors, yet the company has historically been, in my opinion, far more innovative. From M&Ms that provide a hard shell to keep the chocolate from melting to Milky Ways, which was the company’s debut hit product, and then Snickers, Mars has done an excellent job over the years creating novel products with smashing success, whereas Hershey’s has largely had to acquire brands to expand its offerings.

Mars isn’t publicly traded, but if it were, I’d be more inclined to own it than Hershey, given its impressive portfolio of products that also includes Pringles, Cheez-Its, Dove Chocolate, Pop Tarts, Skittles, and Rice Krispy Treats.

So, Daniel and I are passing on Hershey, a falling knife that may well have room to fall further by our calculations, even if we admire the strength of its brands.

There are just too many uncertainties here to try and figure out, including the long-term stability of cocoa supplies, the effects of GLP-1 drugs, and succession planning as the company’s CEO plans to retire by 2026 — something we didn’t even have time to cover.

I suspect many investors will be lured in by the dividend and seemingly cheap P/E ratio (based on last year’s earnings), and I wish them luck if so.

We will continue to instead focus on companies with fewer moving parts critical to the thesis and with more compelling valuations, but we’d love to hear from you if you think differently. Check out our full podcast on Hershey here, and see below for the latest updates on The Intrinsic Value Portfolio.

We’ll see you again next week!

"Value investing is at its core the marriage of a contrarian streak and a calculator.”

— Seth Klarman

📺 WATCH: Aswath Damodaran on making sense of politics in investing, tariffs, and Tesla

🎧 LISTEN: We Study Billionaires — The Founder’s Mindset with Cristiano Souza

📖 READ: Li Lu on Global Value Investing in our Era (Li Lu’s web-archive link)

Enjoy reading this newsletter? Forward it to a friend.

Was this newsletter forwarded to you? Sign up here.

Use the promo code STOCKS15 at checkout for 15% off our popular course “How To Get Started With Stocks.”

Follow us on Twitter.

Keep an eye on your inbox for our newsletters on Sundays. If you have any feedback for us, simply respond to this email or message [email protected].