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Sell Hershey shares due to slowing chocolate sales, surging cocoa prices: UBS

Key Points
  • UBS lowers its rating to sell from neutral for Hershey shares, citing the firm's negative consumer survey results for chocolate sales.
  • "Hershey's portfolio is over-exposed to slowing category consumption, intensifying competition, and rising cocoa prices," the firm's analyst writes.
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Hershey's candy sales will suffer as consumers move towards healthier snacks, according to one Wall Street firm.

UBS lowered its rating to sell from neutral for the food company, citing the firm's negative consumer survey results for chocolate sales.

"Hershey's portfolio is over-exposed to slowing category consumption, intensifying competition, and rising cocoa prices," analyst Steven Strycula wrote in a note to clients Tuesday. "And our UBS Evidence Lab report [survey] identifies reduced purchase frequency for everyday chocolate as preferences shift consumption to healthier snack alternatives and online purchases. These longer-tailed trends carry negative margin mix and potential distribution losses for Hershey."

Strycula lowered his price target to $90 from $106 for Hershey, representing 9 percent downside to Monday's close.

The company's shares are down 3.4 percent Tuesday after the report. Its stock declined 12.5 percent so far this year through Monday versus the S&P 500's 2 percent drop.

UBS' survey of consumers points to "flat to negative" chocolate sales growth for 2018 and 2019, according to the analyst. Strycula said U.S. chocolate sales constitute 74 percent of the company's revenue. He noted that cocoa and cocoa butter prices are up 30 percent year-to-date and represent 15 percent to 20 percent of Hershey's costs.

"Our data analysis highlights increased US promotional activity in chocolate as vendors compete for distribution in a decelerating consumption category," he wrote.

Hershey sent the following statement when asked for comment:

"Our vision is to be an innovative snacking powerhouse. We are working to delight consumers across more snacking occasions beyond confection, and we leverage our advantaged business model and capabilities with a goal to deliver top quartile net sales growth and shareholder return. In a highly competitive and difficult growth environment, we have consistently delivered top and bottom line growth and maintained market share. Our very profitable North American business distinguishes us from many of our peers.

If you look specifically within the combined chocolate and non-chocolate candy segments, where we drive the majority of our U.S. sales, category growth for the full-year 2017 was 2.5%. This is greater than the growth of all snacks combined at nearly 2%, and underscores the important role the confectionery category continues to play with consumers and our retail customers even as we expand across snacks to capture more consumer snacking occasions."

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