HERSHEY was downgraded at BNP Paribas Exane to neutral from outperform on Tuesday (Mar 26), citing the recent surge in cocoa prices that suddenly looks less transitory in nature.

Cocoa futures have more than doubled this year, climbing above US$10,000 per tonne for the first time ever on Tuesday before erasing gains and taking a breather from a historic rally. The commodity is outperforming the stock market’s highest fliers, including Nvidia. Hershey shares, meanwhile, have gained just 2.4 per cent since the start of January, underperforming the S&P 500 Index and the large-cap consumer staples index.

“The implementation of the EU Deforestation Regulation is adding structural costs into the system,” BNPP Exane analyst Max Gumport wrote in a note to clients, following his firm’s expert call with Marc Donaldson, former executive director of the Cocoa Association of Asia and managing director of Asia-Pacific at Barry Callebaut.

“A meaningful portion of the cocoa inflation we are currently seeing could well be structural” due to the EU regulation, he said. This is a “step change” in his stance, which had previously been that the “vast majority” of the cocoa price surge was likely due to a “temporary supply demand imbalance” related to unfavourable weather in West Africa.

Gumport reduced his 2025 adjusted earnings per share (EPS) estimate for Hershey by 9 per cent to US$9.59 due to structurally higher cocoa prices. This represents a Street low, according to data compiled by Bloomberg, which has a consensus target for next year’s EPS of US$10.19.

On a Feb 8 earnings call, Hershey chief executive officer Michele Buck said the company will use “every tool in our toolbox”, including boosting prices, to fight the input inflation. Finance chief Steve Voskuil added that “further price increases should they come would benefit more the back half of the year and probably more so ‘25”.

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However, those comments were not enough to ease concerns at Morgan Stanley, which a few days later downgraded the stock to underweight from equal-weight, citing several risks impeding Hershey’s mid-term outlook, including the “outsized” cocoa inflation.

Hershey has six buy-equivalent ratings, 19 holds, and one sell, according to data compiled by Bloomberg. BLOOMBERG