Hershey: snack maker’s valuation slims on diet drug fears

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US snack makers need to do more than whip up tasty top-line growth to satisfy investors. America’s packaged food companies also need to give convincing explanations as to why the growing popularity of weight loss drugs will not eat into future sales.

This is no easy task. Just ask Hershey. The maker of chocolate bars and Reese’s Peanut Butter Cups delivered another quarter of outsized gains on Friday. Net sales rose 11 per cent year-on-year during the third quarter, while net income climbed 30 per cent.

Yet the stock price fell. Hershey has lost a third of its market value since peaking in May. Shares in other food and beverage companies — including Pepsi, Coca-Cola, Mondelez International and McDonald’s — are down about half that over the same period.

Valuations have slimmed down too. Hershey trades on a multiple of 19 times forward earnings, a quarter below its three-year average.

The market’s dim view of the sector’s growth prospects may be overdone. Hershey — like Pepsi and Keurig Dr Pepper — says it has felt no ill effects from an increase in weight-loss drug use. One reason: many insurance companies do not cover prescriptions for the drugs. With list prices ranging from more than $900 to $1,300 per month, they are pricey for the average American.

Customer bases differ too. At Hershey, whose candies and chocolates provide a perennial Halloween staple, children account for a big proportion of consumers. They are less likely to be prescribed GLP-1 drugs. Snack companies also have other levers to pull, including changing portion sizes of its snacks, if rising use of weight-loss drugs leads to a change in food consumption patterns.

Another big plus for Hershey is its pricing power. Its revenue and profit gain for the quarter was achieved despite just a 0.9 per cent rise in volume. Investors should not underestimate Americans’ taste for junk food and Hershey’s continued success.