Hershey Earnings: Swelling Cocoa Costs Fail to Herald a Competitive Demise; Shares a Bit Undervalued

Confectionery firms have been dogged by the more than threefold increase in cocoa costs since the start of the year. Despite this spike, which contributed to a 130-basis-point swoon in Hershey’s adjusted operating margin to 26.5% in the first quarter, we’ve long held that as the leading domestic chocolate manufacturer with more than one third share, it can use multiple tactics to dull a lasting hit to profits. In this vein, management conveyed that its cocoa needs are covered for the year, and beyond hedging, we think Hershey can also employ a combination of price increases, price/pack alterations, and efficiency improvements if the recent surge shows staying power.