In recent months, every surge in cocoa prices has been accompanied by a decline in the chocolate maker's share price - and vice versa. Since 2023, the surge in cocoa bean prices has been such that The Hershey Company now resembles a near-reverse bet on the performance of the raw material itself.
The inverse correlation is striking: while the price of a ton of cocoa has fallen from $11,280 to $8,500 per ton since May 20, Hershey's stock has risen by nearly 30%.
Change in the S&P GSCI Cocoa Index, measuring changes in the price of cocoa futures contracts, and The Hershey Company. Note the strong inverse correlation since the beginning of the year.
Beyond its sensitivity to cocoa prices, Hershey has for many years been supported by solid fundamentals and a remarkably steady growth trajectory. In ten years, revenue has grown from $7.4bn to $11.2bn, while its operating margin has risen by three points and finally EPS has increased fivefold. At the same time, the group has managed to withstand the pressure of increasingly intense competition. The only apparent downside is the sharp rise in interest expenses, which will probably be exacerbated by the acquisition of LesserEvil, a brand specializing in popcorn.
To cope with the current environment, Hershey plans to raise its prices in the US confectionery market by around 20% from the end of the financial year, as well as implementing further cost savings. However, these levers have already been activated several times since 2019, leaving relatively limited leeway. And even if productivity and pricing gains are achieved, they are likely to be offset by input inflation and customs duties. There is also the risk that volumes decline. The current environment is pushing American households to preserve their purchasing power for essential purchases or cheaper alternatives. These fears explain why the stock has been trading for several months at valuation multiples that are well below their historical average.
However, industry observers anticipate an easing of cocoa prices next year. The recent surge is mainly due to exceptional factors (drought and pests affecting plantations in Côte d'Ivoire and Ghana, the world's two largest producers).
As such, this year appears to be a transitional year. The recent rise in the share price reflects the idea that the worst is behind us and that 2026 will be better.
