Shares of chocolate maker Hershey Co. jumped 3% Thursday, after Bernstein upgraded the stock to outperform from market perform and said a 37% decline in cocoa costs since last summer should boost margins. Cocoa costs account for 10% to 15% of Hershey's cost of goods sold, according to Bernstein's estimates, and the commodity is expected to continue to decline in price in the next few years. "Easing cocoa prices could be a major tailwind as we move out into 2018, more than offsetting the relatively mild inflation in dairy prices," wrote analysts led by Alexia Howard. "The last time cocoa prices declined in 2011, the company saw its gross margin improve from 42.4% in 2011 to 46% by 2013." Bernstein expects the U.S. chocolate market to keep growing modestly, buoyed by a millennial preference for snacking, innovation and higher marketing spend in response to Mondelez's entry to the market. Finally, food labels that were to be introduced in 2018 that would specify what percent of a daily allowance of sugar is in chocolate has been postponed, said the note. Hershey shares have gained 5.4% in 2017, while the S&P 500 has gained about 10%.
Copyright © 2017 MarketWatch, Inc.
Continue Reading Below