3 Reasons to Buy Hershey Stock Like There’s No Tomorrow

When you can buy a great company at the right price, it’s often a good time to buy. When the price looks cheap, it can be a great time to buy.

Confectioner Hershey (HSY 1.19%) looks somewhere between fair price and cheap. Don’t miss the chance to buy it because of a little uncertainty in the short term. Here are three great reasons to jump at the chance to own the stock today.

1. Hershey looks like a bargain

Every business goes along a sinusoidal curve, with good times followed by bad times and vice versa. Right now, Hershey is facing some issues (more on that below), and investors are disappointed about the stock. If you’re a dividend investor who thinks in terms of decades rather than days, this is an opportunity. Some numbers will help prove that.

Image source: Getty Images.

Hershey’s price-to-sales (P/S) ratio is currently around 3.8. The five-year average for that rating measure is 4.1. The company’s price-to-earnings ratio (P/E) is 22.5, compared to a five-year average of 25.5. Clearly, based on more traditional metrics, the stock looks attractively priced.

But don’t stop there: Its dividend yield is around 2.7%, which happens to be considerably higher than its five-year average of 2%. If you’ve ever looked at Hershey stock and thought, “If only it were cheaper,” well, it’s cheaper right now.

HSY data by YCharts.

2. Hershey’s business is improving even if its earnings are hard to read

One of the things that is interesting about Hershey today is that it has upgraded its distribution system. But those come with risks, especially for the company’s retailers, who rely on it for products.

If the launch of the new system does not go well, customers could end up without the inventory they need. Thus, retailers built up their stocks before switching to the new system, which boosted sales. The new system is working well, but retailers are reducing the inventory they previously built, and now sales are falling.

This is not exactly good news, but not really bad news either. It is more of a necessary issue in the long-term business improvement process. In other words, don’t read too much into the company’s earnings right now, even though sales fell more than 16% year-over-year in the second quarter.

There is another wrinkle in this issue. About 9 percentage points of the decline was related to the system upgrade. The other 7 percentage points were related to the seasonality of Hershey’s business. Candy sales are heavily influenced by holidays, which can change between quarters. So the numbers look really ugly with the double whammy, but there’s probably no reason to worry.

3. The biggest headwind is cocoa

The only downside that investors should monitor closely is the price of cocoa, a key ingredient in chocolate. There is an element of general inflation to the massive price increase that has occurred, but there are also fundamental reasons why cocoa prices may have moved into a higher range (including aging crops and plant diseases). This will hurt Hershey’s earnings. How bad is it? Cocoa is trading near all-time highs.

But people love chocolate and have historically been willing to pay higher prices for this relatively low-end luxury. In the short term, Hershey believes it will be able to see price increases of about 6% to 7%.

That said, the plan isn’t to go through all the cost increases right away. Instead, management wants to take it slow, accepting a temporary hit to margins as price increases ease over time. It seems like a prudent way to deal with the problem.

Given the company’s long and successful history, it seems logical to give management the benefit of the doubt and see the concern here as yet another reason to take a contrarian stance on the stock.

Unfavorable Hershey could be a tasty treat

If Hershey were firing on all cylinders today, they wouldn’t be on the shelves. But if you can look at the long-term history of the business and its stock and recognize that this dip is likely to be temporary, then now is the time to get on board. This is especially true if your time horizon is long.