Hershey (HSY): Assessing Earnings Resilience Amid Cocoa Costs and Tariff Pressures

The Hershey Company (HSY) has long been a staple of the confectionery sector, but its 2025 earnings trajectory is now a battleground for value investors. With cocoa prices surging to record highs and tariffs compounding costs, the company’s ability to balance price hikes with margin preservation will determine its resilience. For investors seeking undervaluation and earnings surprises, the calculus is complex.

Cocoa Inflation and Tariff Headwinds

Global cocoa prices hit $10,750 per tonne in early 2025, driven by supply chain disruptions and disease in West African farms [1]. Hershey, which sources 70% of its cocoa from Côte d’Ivoire and Ghana, has hedged some of these costs but still faces inflationary pressures. The company’s Q2 2025 earnings of $1.21 per share—surpassing estimates by $0.23—masked deeper vulnerabilities. Gross margins contracted from 40.2% to 30.5% year-over-year, reflecting cocoa inflation and derivative losses [4].

Tariffs have added another layer of strain. Hershey now expects $170–180 million in tariff expenses for 2025, up from an initial $15–20 million projection [2]. These costs, embedded in full-year guidance, have forced the company to revise adjusted earnings per share (EPS) downward to a 36–38% decline, compared to prior forecasts of a mid-30% drop [1]. CEO Michele Buck has cautiously lobbied for tariff relief, but current guidance assumes the worst-case scenario.

Value Investing Metrics: A Mixed Picture

Hershey’s financials reveal a company with both strengths and risks. Its debt-to-equity ratio of 1.25 [5] suggests leverage, but free cash flow of $0.30 per share in Q2 2025 indicates liquidity [2]. The P/E ratio of 36.2x [3] is elevated for a value play, yet intrinsic value models suggest the stock is overvalued by 26% compared to its current price [6]. Analysts project a $184.64 price target, but this relies on cocoa prices stabilizing at $6,000 per tonne—a scenario dependent on a production rebound in Côte d’Ivoire [4].

Earnings Surprise Potential

Hershey’s Q2 performance—a 26% revenue increase driven by Halloween demand and pricing power—demonstrates short-term resilience [4]. However, Q3 2025 estimates have been slashed to $1.26 per share from $1.48, reflecting margin pressures [2]. The company’s “Smart Complexity” initiative—aimed at simplifying packaging and boosting automation—could mitigate some costs, but benefits will take years to materialize.

For value investors, the key question is whether Hershey’s pricing power can offset cocoa and tariff costs. The company has raised prices by “lower double-digits” to absorb input costs [2], but gross margins remain vulnerable. If cocoa prices stabilize and tariffs are reduced, Hershey could deliver a positive earnings surprise. Conversely, persistent inflation or trade tensions could deepen the 36–38% EPS decline.

Conclusion

Hershey’s 2025 earnings resilience hinges on its ability to navigate a perfect storm of cocoa inflation and tariffs. While its Q2 results exceeded expectations, the full-year outlook is clouded by margin compression. For value investors, the stock’s high P/E and debt load are red flags, but its intrinsic value gap and strategic initiatives offer a glimmer of hope. The coming quarters will test whether Hershey can transform short-term pain into long-term gains.

Source:
[1] Hershey lowers guidance due to tariffs [https://www.foodnavigator-usa.com/Article/2025/07/31/hershey-lowers-guidance-due-to-tariffs/]
[2] Zacks Research Has Bearish Estimate for Hershey Q3 2025 Earnings [https://www.marketbeat.com/instant-alerts/what-is-zacks-researchs-forecast-for-hershey-q3-earnings-2025-08-22/]
[3] Financials The Hershey Company - HSY [https://www.marketscreener.com/quote/stock/THE-HERSHEY-COMPANY-12988/finances/]
[4] Hershey's Q2 Performance and Margin Actions [https://www.ainvest.com/news/hershey-q2-performance-margin-actions-pricing-power-cost-management-sustain-cocoa-driven-inflation-era-2508/]