Why Hershey Stock Still Holds Potential After Takeover Rejection

At the beginning of December 2024, an interesting development occurred that some investors had anticipated, although not quite in the way it unfolded. Hershey Co. (NYSE: HSY) saw its stock climb despite increasing cocoa prices and a general lack of interest in consumer staples stocks. The unexpected boost came from news of a potential takeover bid, a scenario familiar to those well-versed in value investing.

Hershey’s stock is considered a strong buy at current prices, even after the recent rally. This is largely due to management’s decision to reject the takeover bid, labeling the offer as undervaluing the company—a move that many Wall Street analysts support.

Before delving into Hershey’s strengths and the factors that could drive a buying spree, it’s important to understand the takeover offer from Mondelez International Inc. (NASDAQ: MDLZ) and why Hershey’s management turned it down. Despite the bid, Hershey’s stock has significant potential for growth in the coming months.

The Takeover Bid Hershey Turned Down: Offer Details and Management’s Reasons for Rejection

Although specific details of Mondelez’s offer aren’t public, market reactions provide clues. Hershey’s stock surged to $208 per share, suggesting that this was the ballpark of Mondelez’s bid, which management deemed insufficient.

The $208 per share price would reflect a market cap of up to $39 billion, a drop from its valuation of $56 billion a year ago. Historically, investors might estimate the stock’s value anywhere from $208 up to its peak of around $275 per share.

One reason for rejecting the offer is the shift in popularity from consumer staples to emerging technologies like AI and quantum computing. This trend has impacted stocks like Coca-Cola Co. (NYSE: KO) and PepsiCo Inc. (NASDAQ: PEP), making them attractive buys due to their potential undervaluation.

This is Why Hershey Stock Has More Upside Ahead

Despite analysts’ current valuation of $185.2 per share, Hershey’s stock should potentially be valued higher. In April 2023, price targets were as high as $265 per share, raising questions about why targets have since decreased. This decline could reflect pressure to align with the market’s view.

However, Hershey’s financial performance tells a different story. The company’s gross margin of 44.5% suggests strong pricing power and market share. This profitability allows for reinvestment and value creation, evidenced by a return on invested capital (ROIC) of up to 25%.

Over time, stock prices often align with long-term ROIC rates, explaining Hershey’s 200% outperformance against the S&P 500 over the past 24 years. Without the recent stock decline, this figure could be closer to 500%.

Institutional investing also supports this view. As of November 2024, State Street increased its holdings in Hershey by 5.8%, now owning 3.5% of the company, valued at $1.3 billion.

Before making any decisions on Hershey, consider this: MarketBeat monitors top-performing research analysts and their stock recommendations. Hershey wasn’t among the five stocks they quietly suggest buying now.

View The Five Stocks Here

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