In a year where most stocks are falling hard, The Hershey’s Company (NYSE: HSY) stands out for the right reasons. Heading into its quarterly earnings report, shares of the candy-making giant were up over 25% for the year. And there was nothing about the earnings report that should cause investors to think this growth was just a sugar high.
But HSY stock is down about 2.5% in midday trading, and not all of that can be blamed on the hotter-than-expected jobs report that is dragging the market down. Considering at one point the stock was up 5% during the last 30 days, this appears to be a case of investors looking to take a little profit as they head into the weekend.
But if the sell-off deepens it will make Hershey look even more attractive to investors who have been waiting for a better entry point for HSY stock.
A Sweet Earnings Report by Every Measure
Hershey’s delivered a “trifecta” that analysts and investors love. Revenue came in at $2.73 billion. That was higher than the $2.62 billion projected by analysts. And on the bottom line, Hershey’s delivered $2.17 in earnings per share (EPS), which was higher than the $2.10 that was forecast.
But the news got even better. The company raised its full-year EPS guidance to a range of $14 to $15 per share. The previous guidance was for a range of $12 to $14.
Halloween is the company’s biggest driver of revenue and earnings. And with this year being the first year in the last three without Covid restrictions, candy sales were strong. The company is forecasting that demand to remain strong, and it noted that its price increases have done nothing to deter consumers from indulging their sweet tooth.
Becoming a Formidable Dividend Stock
Hershey’s also announced that it would be issuing a $1.03 quarterly dividend to shareholders. This makes it 12 straight years of increases for the company. The company’s dividend yield is 1.82% which is lower than the average for consumer staples companies. But income-oriented investors won’t want to ignore the annual payout of $4.14 per share.
Is HSY Stock Overvalued?
If there’s one thing that may hold investors back, it’s the company’s valuation. A company’s price-to-earnings (P/E) ratio does not tell the whole story. For example, Hershey’s has a profit margin of over 16%, which is excellent for the sector.
But it’s hard to ignore its P/E of over 28x. That’s nearly double the S&P 500 average and it’s also above its sector average, which is around 19x earnings.
The question will be whether the company’s growth will continue to support that valuation. And here is where analysts seem to be balking. Hershey’s has been growing average revenue and earnings at a double-digit pace in the last five years. Both are projected to come in in the low single digits over the next five years.
Heading into earnings, HSY stock was trading above the consensus price target of analysts tracked by MarketBeat. But the stock still has a moderate buy rating and there hasn’t been much reaction to the earnings report. Price target upgrades may be in store.
From a purely technical point of view, HSY stock is near a key level of support at around $225. If it holds here, the general downtrend ahead of earnings suggests it could bounce back. If this support doesn’t hold the next line to watch is in the $210 to $215 range.
That may be what some investors hope for, but hope isn’t a strategy. In the absence of any unforeseen bad news, this may be the best dip investors get for a while.