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The start of December 2024 brought a story that some investors already expected to see, but not as it happened. Despite rising cocoa prices and a seeming lack of interest in consumer staples stocks, Hershey Company. New York Stock Exchange: HSY rallied on unexpected news. For those versed in value investing, news of a potential takeover bid was not unusual.

Hershey today

$183.01 -0.94 (-0.51%)

(As of 12/13/2024 ET)

52 week range

$168.16

▼

$211.92

Dividend yield

2.99%

P/E ratio

21.08

Target price

$185.17

For reasons that will become clear in a minute, Hershey shares – and the company behind them – are being heavily bought at these prices, even after the recent rally. Even without any financial analysis of the business, investors can rely on this fact: Hershey management decided to reject the offer, citing that the valuation included in the takeover bid was “too low.” Contrary to what some may think, this is a great move that Wall Street analysts agree with.

Before diving into the company’s strengths and what could trigger a potential surge in buying of its stock in the future, let’s look at the details of this takeover bid from Mondeles International Inc. NASDAQ: MDLZ should be looked at first to understand what was proposed and why management decided that the proposal was not good enough today. No matter how you look at it, there’s likely ample double-digit upside potential in these stocks for the coming months.

Hershey Takeover Bid Rejected: Details of the Bid and Management’s Reasons for Rejection

While no sources are saying the size of the deal proposed by Mondelez, there are ways investors could reverse engineer what the original offer could have been. The way markets drove the stock to a high of $208 per share on the news is one way to set expectations, both in cases where Mondelez might get close to the rate and in cases where management thought it was too low.

That price of $208 per share would represent a market capitalization of up to $39 billion based on the valuation. However, that’s a fraction of the company’s $56 billion size just over a year ago. Taking a historical perspective, investors would expect the stock to then range from $208 per share to an all-time high of $275 per share.

There are several reasons why management would reject this proposal, one of which is that most of the major brands in today’s market are losing popularity due to other hot developments in the technology sector, namely artificial intelligence and quantum computing.

This is why stocks are loved Coca-Cola Company. NYSE: K.O. And PepsiCo Inc. NASDAQ: PEP have traded lower over the past few months. In the short term, the stock market is a popularity contest, and other, more interesting names win the competition, making these established brands potential buyers today.

Here’s Why Hershey Stock Has Greater Future Upside Potential

Now that investors have a guide to the potential valuation range for Hershey stock, it’s time to dig a little deeper and analyze the public sentiment surrounding the stock and the reasons why that sentiment is that way. When it comes to Wall Street analysts, the consensus valuation of $185.2 per share does not reflect where the stock should trade.

In April 2023, analysts had a price target for the stock of $265 per share, but some things have remained the same since then to this day, raising some suspicion as to why the price targets have dropped so much. This could be due to lower share prices, which puts additional pressure on analysts to reflect market views.

However, Hershey’s financials will tell a completely different story, one that could soon turn analysts’ opinions on their head. The company’s gross margin of 44.5% over the past 12 months signals potential moats and pricing power dynamics in the brand’s market share.

Retaining so much capital after each sale allows management to effectively reinvest in the business and create additional enterprise value, which is why investors will see a return on invested capital (ROIC) for Hershey of up to 25%.

This is important because annual stock prices tend to follow the long-term rate of return on investment over time; That’s why investors will see Hershey stock’s 200% outperformance relative to the S&P 500 over the past 24 years, which would have been closer to 500% if not for the stock’s decline over the past 12 months.

Another indicator that supports this view can be found in institutional investing; As of November 2024, State Street holders felt confident enough in the stock’s value that they increased their holdings in the stock by 5.8%, bringing their net position to today’s high of $1.3 billion, or 3.5% ownership in companies.

Before you consider Hershey, you might want to hear this.

MarketBeat tracks Wall Street’s top-rated and best-performing analysts daily and the stocks they recommend to their clients. MarketBeat identified five stocks that top analysts were quietly telling their clients to buy now, before the broader market caught on… and Hershey wasn’t on the list.

While Hershey currently has an Analyst Rating of Underweight, the top-rated analysts consider these five stocks to be Strong Buys.

View five stocks here

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