Over the past six months, Hershey has been a great trade, beating the S&P 500 by 15.1%. Its stock price has climbed to $217.99, representing a healthy 17.5% increase. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Hershey, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Hershey Not Exciting?
Despite the momentum, we don't have much confidence in Hershey. Here are three reasons we avoid HSY and a stock we'd rather own.
1. Demand Slipping as Sales Volumes Decline
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
Hershey’s average quarterly sales volumes have shrunk by 1.2% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable. 
2. Shrinking Operating Margin
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Looking at the trend in its profitability, Hershey’s operating margin decreased by 13.5 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 12.3%.
3. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Hershey, its EPS declined by 9.5% annually over the last three years while its revenue grew by 3.9%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Hershey’s business quality ultimately falls short of our standards. With its shares outperforming the market lately, the stock trades at 25.9× forward P/E (or $217.99 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better stocks to buy right now. Let us point you toward one of our top software and edge computing picks.
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