On Tuesday, Bernstein SocGen Group maintained a Market Perform rating for Hershey (NYSE: HSY) with a $189.00 price target. The stance follows a recent surge in Hershey's stock price prompted by unconfirmed reports of a potential takeover by Mondelez (NASDAQ:MDLZ) International (NASDAQ: MDLZ).
According to the reports, Hershey's shares experienced an approximate 13% increase, while Mondelez saw a decline of about 2.5%. The stock's recent performance aligns with InvestingPro data showing a 7.9% return over the past week, though current analysis suggests the stock may be slightly overvalued.
With a market cap of $39.4 billion and a P/E ratio of 22.7, Hershey maintains strong fundamentals, including a 15-year streak of dividend increases.
The analyst highlighted skepticism regarding the feasibility of such a merger, pointing out that market participants might be neglecting a significant licensing agreement Hershey has in place.
Specifically, Hershey's longstanding deal with Rowntree, which was later acquired by Nestle (NS:NEST), grants Hershey the perpetual rights to license popular confectionery brands KitKat and Rolo in the United States.
According to InvestingPro's comprehensive analysis, Hershey operates with moderate debt levels and maintains strong cash flows sufficient to cover interest payments, factors crucial for any potential merger consideration.
Financially, the KitKat and Rolo brands contribute roughly 6.8% to Hershey's total sales, equating to around $750 million, and about 9.0% to its total EBIT, which is approximately $220 million. The analyst underscored a change of control clause within this agreement that would revoke Hershey's distribution rights in the event of an acquisition, thereby allowing Nestle to reclaim sales rights in the U.S. market.
The implication of this clause is that a potential acquisition by Mondelez would exclude these two significant brands from Hershey's portfolio, resulting in a 9.0% reduction in EBIT. This loss could potentially outweigh any synergies that might arise from the merger, not to mention additional costs that could be incurred.
In summary, the analyst reaffirmed the Market Perform rating for Hershey shares at a price target of $189, suggesting that the current market reaction may not fully account for the complexities of Hershey's existing agreements and the potential financial impacts of a takeover.
The analyst also reiterated an Outperform rating for Mondelez with a target price of $92. For deeper insights into Hershey's valuation and financial health metrics, including 10+ additional ProTips and comprehensive analysis, investors can access the full research report on InvestingPro.
In other recent news, Mondelez International is reportedly considering an acquisition of The Hershey Company (NYSE:HSY), a move that has stirred interest among investors and analysts.
Stifel sees this potential transaction as compelling, citing Hershey's strong brand presence and the strategic benefits Mondelez could gain, particularly for international leverage and breaking into the U.S. chocolate market.
Amidst this speculation, CFRA has upgraded Hershey from Sell to Hold, while TD Cowen and JPMorgan have maintained their hold stances on Hershey with price targets of $190 and $171 respectively.
The Hershey Trust Company, which holds about 80% of the total voting power, plays a significant role in any potential acquisition. Hershey continues to uphold strong fundamentals, with a 44.5% gross profit margin and regular dividend payments for over half a century. In addition to these developments, Hershey has been diversifying its product portfolio, recently acquiring Sour Strips, a sour candy brand.
Despite challenges such as rising cocoa costs and market share losses, Hershey maintains steady financial performance. Analysts from various firms, including Jefferies and Piper Sandler, highlight potential benefits of a speculated acquisition of Hershey by Mondelez, which could strengthen the latter's position in the snack market. However, the final decision on any deal would greatly depend on the Hershey Trust's agreement to the proposed terms.
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