There is a chocolate crisis.
That statement doesn't sit well with me. I love chocolate.
But the crisis is providing a gift to buy one of the most well known brands in the chocolate space. The Hershey Company.
The price of cocoa/cacao has gone bonkers. These trees grow in specific regions and the ones in West Africa are being impacted by disease and weather at a horrific rate. This has caused the price of cocoa to go much higher.
How high? The price of cocoa has been creeping up but has spiked 50% this year alone. And the most important ingredients for Hershey are sugar and cocoa. Not good.
Management is doing the best job they can but they can't raise prices dramatically without impacting customers. So, they are just eating the increase and bringing in a lower margin on the product.
One good piece of news is that they have other products outside of chocolate. They may be known for Reese's and the Hershey bar, but they also have other candies and snacks. The other good piece of news is that there are ways to use a lower quality chocolate to produce those same finished chocolate products.
Aside from offering SkinnyPop, Jolly Ranchers, and other salty snacks, Hershey has also done an ERP system upgrade that should allow for better inventory management and sales going forward.
So why would I buy the stock now? Despite the challenges and outrageous price of cacao, I think Hershey is the type of company that can navigate the challenge better than others. And the dip in the stock price is likely a gift. Management is solid and the diversification away from chocolate will help them.
That doesn't mean this stock is going to recover immediately from here. The price of cacao can get worse (although I hope it doesn't). But it's more likely cacao prices ease years down the road rather than staying this elevated.
Hershey also provides a nice dividend (which they continue to raise) and they also have a share repurchase program. There is a chance they won't be aggressive this year with the repurchase program due to the external pressures they are facing but there is a possibility they see the current stock price as an opportunity.
There is no guarantee that any investment will work but I feel pretty good about buying a brand that has been around for generations and can navigate the the ups and downs of the consumer and the commodity. If we look back over the years the valuation is as cheap today as it's ever been at about 20x earnings. 2024 will be a tough year for them but this year will come and go. And as the years carry on Hershey will thrive again when prices of cacao come down but the prices of their chocolate bars for the consumer do not.
I've bought the stock just below $192 with the intention that this will be a tough year and I might get a chance to add a little more below $180. But in the off chance I don't get that opportunity I have enough to make me happy to be buying it today.