Hershey is getting a boost from snack-craving millennials, whose demand for indulgent chocolates will propel the company in coming years despite their reputation for healthy meals, Bernstein said in a note.
The research firm upgraded Hershey shares to outperform from market perform and raised its price target on the chocolatier, citing falling cocoa prices as another key driver for the stock.
"Millennials love to snack," analyst Alexia Howard wrote in Thursday's note. "So snacks are holding up much better than center-of-plate or meal-based categories: And even though better-for-you snacks like fresh fruit and ready-made salads are the fastest growing sub-segments, indulgent snacks like chocolate are also holding up."
Hershey shares jumped 2.6 percent Thursday.
Snack volume and dollar share growth in 2017
Source: Bernstein Research
Bernstein also noted that the price of cocoa, which accounts for 10 to 15 percent of Hershey's cost of goods sold has fallen 37 percent since last summer.
"We believe there could be a very solid opportunity for Hershey to see margin improvement as cocoa prices moderate over the next several years," Howard said. "The last time cocoa prices declined in 2011, the company saw its gross margin improve from 42.4 percent in 2011 to 46 percent by 2013."
The Mars-led mapping for the cocoa genome in particular could increase cocoa yields by as much as 500 percent over the next decade, according to the report. These falling prices will more than offset modest inflation in dairy prices and could lead to significant financial gains for the chocolate company, Bernstein said.
The research team raised its 12-month price target to $127 from $109, representing 20 percent upside from Wednesday's close.
Hershey's recent second-quarter earnings report beat Wall Street expectations last month thanks to increased demand and falling input costs, prompting positive remarks from the company's top brass.
"There's not any one big thing that we are trying to protect ourselves against," CEO Michele Buck said during the earnings call. "I actually think what we really want to do is make sure that we have the opportunity to invest into this marketplace."
"There are a lot of new capabilities."