Hershey's Fiscal 2026 Recovery Potential Amid Tariff and Cocoa Cost Pressures: Assessing Market Pricing and Tactical Opportunities

The global food and beverage sector is no stranger to volatility, but few companies face the unique confluence of challenges as The Hershey Company (HSY) does in 2025. Rising cocoa prices, a cornerstone of its cost structure, and the specter of U.S. tariffs have forced the confectionery giant to revise guidance downward. Yet, beneath the immediate noise lies a compelling case for long-term value creation in 2026, provided investors can discern whether the market has already priced in the full extent of these risks—and whether the path to recovery offers tactical entry points.

The Dual Headwinds: Cocoa Inflation and Tariff Uncertainty

Cocoa prices have more than doubled over the past two years, driven by poor harvests in West Africa and supply chain bottlenecks. As of July 2025, futures hover near $8,459 per tonne—a 121% increase from two years ago. While prices have retreated from the December 2024 peak of $11,984, they remain historically elevated, locking in higher input costs for Hershey. The company has hedged 2025 cocoa prices well below current market levels, but 2026 is expected to see further inflation due to ongoing production challenges in key regions like Ivory Coast and Ghana.

Simultaneously, U.S. trade policy has added a layer of uncertainty. Hershey anticipates $170–180 million in tariff expenses for 2025, fully embedded into its revised guidance, which now includes a 675–700 basis point decline in adjusted gross margins and a 36–38% drop in adjusted EPS. While the company has lobbied for exemptions (given cocoa's exclusive reliance on international sourcing), relief remains unconfirmed. The interplay of these factors has forced Hershey to adopt a “1-to-1” pricing strategy—a double-digit price increase across its U.S. confection portfolio—to offset costs without sacrificing volume.

Market Pricing: Overvalued or Undervalued?

Hershey's stock currently trades at a P/E of 23.4x, slightly above its long-term average of 23x. Analysts have raised 2026 EPS estimates to $6.83 from $6.04, reflecting confidence in management's ability to navigate challenges. However, the stock's price of $186.23 sits above the consensus 12-month target of $166.43, suggesting a potential overvaluation based on current earnings and revenue growth expectations. This discrepancy raises a critical question: Are investors already pricing in a full recovery in cocoa prices and tariff relief by 2026?

The answer appears to hinge on two variables: price elasticity and trade policy outcomes. Hershey's “1-to-1” pricing model implies minimal sales drag from higher prices, but this assumes stable consumer demand—a fragile assumption in a high-inflation environment. Meanwhile, while public statements from U.S. officials hint at potential exemptions for non-domestically produced commodities like cocoa, no concrete policy has emerged. Until these uncertainties resolve, the market may remain cautious.

Tactical Entry Points: Monitoring Catalysts and Valuation Gaps

For investors positioned for a 2026 recovery, the key lies in identifying tactical entry points tied to near-term catalysts. Three scenarios warrant attention:

1. Tariff Relief Confirmation: If the U.S. government formally excludes cocoa from tariffs—driven by lobbying and economic logic—Hershey's cost structure could improve significantly. This would likely trigger a re-rating of its earnings power, particularly if the company demonstrates margin expansion through hedging and pricing discipline.

2. Cocoa Price Normalization: While current prices remain elevated, forecasts suggest a potential pullback to $8,770–$10,222/tonne in 2026, depending on weather and crop conditions. A moderation in input costs would amplify the benefits of Hershey's price increases, enhancing gross margins and free cash flow.

3. Execution on Innovation and Market Share Gains: Hershey's recent product launches, such as the Reese's Oreo Cup collaboration, and its focus on premiumization, could drive revenue growth even in a cost-pressured environment. A 3.7% annual revenue growth forecast (vs. 9.1% for the broader market) underscores the need for execution-driven differentiation.

Risk Mitigation and Positioning Strategy

The current consensus of 17 analysts—13 “Holds,” 3 “Sells,” and 1 “Buy”—reflects a cautious but not bearish outlook. However, the wide dispersion in price targets (ranging from $154 to $220) highlights diverging views on risk-adjusted returns. A tactical approach would involve:

• Dollar-cost averaging into dips below $170, which aligns with the lower end of analyst targets and offers a margin of safety.
• Monitoring earnings surprises: Hershey has outperformed its industry in EPS and sales estimates with a consistent track record, beating expectations by 0.12 to 0.23 in EPS surprises from 2022 to the present. A beat in Q3 or Q4 2025 could signal improved guidance and attract momentum-driven buying.
• Watching for policy updates: Investors should track U.S. trade negotiations and cocoa-specific exemptions, which could serve as a catalyst for a near-term rally.

Conclusion: A Case of Asymmetric Potential

Hershey's 2026 recovery hinges on resolving two major uncertainties—cocoa prices and trade policy—while executing on pricing and innovation. The stock's current valuation appears to reflect a baseline scenario of continued cost pressures, but the upside potential is asymmetric if either of these risks abates. For disciplined investors, the path forward involves a balanced approach: hedging against short-term volatility while positioning for a re-rating if the company navigates 2025 successfully and gains clarity on 2026.

In a market that often overreacts to near-term noise, Hershey's long-term moat—its brand strength, pricing power, and global demand for chocolate—remains intact. The challenge is not in the company's fundamentals, but in the market's ability to distinguish between transitory pain and enduring value. For those who can see beyond the headlines, the next 12 months may offer a compelling opportunity to acquire a consumer staple with a resilient business model at an attractive price.