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Soaring cocoa prices put spotlight on Hershey, Mondelez earnings
Global Banking & Finance Review®
Company
By Granth Vanaik
(Reuters) – Hershey and Mondelez International investors will be eager to see how the chocolate makers plan to tackle the recent surge in cocoa and sugar prices when they report first quarter results this week.
These companies have already been grappling with heightened costs in the past few quarters, which they have in part passed on to consumers by raising prices.
A recent surge in cocoa prices amid a shrinkage in supplies due to droughts and inconsistent rainfalls as well as crop disease in the world’s top cocoa producing regions could spell more trouble for them.
In addition, sugar prices have also spiked in recent months.
“A lot of investors are waiting to learn about how the consumer is reacting to the current price of chocolate in the market and how that influences the companies’ decisions to take more pricing in the future,” said Sean King, an analyst at Columbia Threadneedle Investments, which holds shares of both Hershey and Mondelez.
THE CONTEXT
Cocoa prices – which have nearly tripled in value this year – currently form about 20% and 10% of Hershey and Mondelez’s cost-of-goods-sold (COGS), respectively, according to Jefferies.
“Typically, these companies incur higher cocoa costs first and then they go to their retail customers and try to increase prices,” said CFRA Research’s Arun Sundaram, adding there could potentially be stronger pricing in the second half.
The possibility of more price hikes comes when demand has already started to falter and companies try to make up for the fall by raising prices.
Data from market research firm Circana showed unit sales for chocolate in the U.S. dropped 1.8% in 13 weeks ending March 24, while prices climbed 6.3%.
“The big question would be whether price-related growth is enough to offset volume declines that we’re likely going to see this year,” Sundaram noted.
THE FUNDAMENTALS
** Mondelez, which reports results on April 30, is expected to report a slight drop in profit for the first time in 14 quarters to 89 cents
** Its quarterly sales are expected to be flat
** Mondelez’s organic volume growth was at 1.3 percentage points (pp) in 2023, while prices rose 13.4 pp.
** Hershey, which reports results on May 3, will see profit drop for the first time in 25 quarters to $2.76
** Quarterly revenue is expected to increase to about 4.2%.
** Hershey’s organic volume dropped 1.3% in 2023, while prices climbed 8.3%
WALL STREET SENTIMENT
** Mondelez shares are down 4.3% in the last one year, while Hershey has fallen nearly 32%
** 26 analysts rate Mondelez “buy” on average, with a median price target of $82 – LSEG
** 24 analysts rate Hershey “hold” on average, with a median price target of $208
(Reporting by Granth Vanaik in Bengaluru; Editing by Krishna Chandra Eluri)
Cocoa pricing refers to the market value of cocoa beans, which are essential for chocolate production. Fluctuations in cocoa prices can significantly impact chocolate manufacturers' costs and profitability.
Cost-of-goods-sold (COGS) is the direct costs attributable to the production of the goods sold by a company. This includes costs like materials and labor directly tied to the production process.
Organic volume growth measures the increase in sales volume from existing operations, excluding any effects from acquisitions or divestitures. It reflects a company's ability to grow its business without external factors.
Pricing strategy is the method companies use to price their products or services. It involves setting prices based on market demand, competition, and production costs to maximize profitability.
Quarterly earnings reports are financial statements released by publicly traded companies every three months. They provide insights into a company's financial performance, including revenue, expenses, and profit.
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