Don't Sweat Hershey's Earnings: Investors Should Focus on This Instead

Shares of Hershey (NYSE: HSY) have fallen roughly 40% from their peak in 2023. The big problem for the confection maker is a steep rise in the price of cocoa, a key ingredient in its chocolates. Management is warning that 2025 earnings will be terrible, but that may not be the right indicator to watch right now.

What does Hershey do?

Hershey is best known for its chocolates, but it is really a snack maker. Its snacks are predominantly of the sweet variety, including things like gummies and hard candy, but in recent years the company has been expanding into salty snacks. On the salty snack side, Hershey makes pretzels (Dots), popcorn (SkinnyPop), and extruded snacks (Pirate's Booty). In fact, it recently inked a deal to add LesserEvil, which makes "better-for-you snacks," to the salty snack mix.

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Image source: Getty Images.

Right now, however, it is Hershey's chocolate confections that are the biggest concern. The company's brands, including its namesake, Reese's, and others, aren't the issue. The problem is that cocoa prices have risen so sharply that there's no way to easily pass the costs on to consumers. Hershey is going to have to absorb the costs, at least for a little while. That, in turn, will depress 2025 earnings.

The hit is going to be huge. In 2024 Hershey earned $9.37 per share on an adjusted basis. That was down a little over 2% from 2023 despite the rise in cocoa prices because the company's hedging activities offset the hit. But those hedges are rolling off, and 2025 will see an adjusted earnings decline in the mid-30% range, according to the company's fourth-quarter earnings update.

Things are bad for Hershey, but it's not all bad news

Herhsey's cocoa costs have skyrocketed, and that's a problem. But even in light of that hit, the company is projecting a sales increase of "at least 2%" in 2025. The addition of LesserEvil, which probably won't close until later in the year, will help lift revenues further, with most of the benefit likely to come in 2026.

In other words, Hershey's food business is still growing. Earnings are important, but they can be highly volatile. Revenues tend to be a more consistent number and, often, show that a business is operating well even when earnings are in the dumps. As the chart below highlights, Hershey's earnings have been far more variable than its revenues over time.

HSY Revenue (Annual) data by YCharts

There are very real reasons to be concerned about Hershey's business in 2025. However, the concerns are likely to be temporary. Higher cocoa prices will, eventually, lead to lower prices, which is the common trend in commodity markets. The higher prices result in more investment and that, in turn, leads to more supply. It could take a few years because of the nature of the cocoa crop, but it is unlikely that this is a permanent change to the market.

In the meantime, chocolate is an affordable and decadent luxury that consumers love to eat. Hershey can't simply pass through all of its cost increases right away, but it should be able to slowly push through more price hikes over time. As long as the company's sales hold up, the business itself is still operating well.

A bad year does not make Hershey a bad company

There's no way around it -- 2025 is going to be a terrible year for Hershey on the earnings front. But a bad year of earnings does not make Hershey a bad company. It is simply facing some near-term headwinds, which is normal for any business. As long as this consumer staples maker continues to grow its top line, the company's business should be OK over the long term.

So don't focus all of your attention on Hershey's earnings in 2025. Make sure to also watch the company's sales trends. As long as sales remain resilient, the stock drop is highly likely to be a buying opportunity for long-term investors, noting that the 3.3% dividend yield is historically high right now.

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Reuben Gregg Brewer has positions in Hershey. The Motley Fool has positions in and recommends Hershey. The Motley Fool has a disclosure policy.