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The Hershey Company Stock Analysis Report

Finance 305W

Penn State University Meredith Cinciripino

June 21, 2013

Executive Summary A stock analysis of The Hershey Company, strongly suggests that stockholders should hold Hershey's stock (). Hershey's P/E ratio and growth are both expected to decline in the future; due to this prediction, it would be wise to hold the stock while its value is high and still increasing and to sell the stock once you believe Hershey has hit its peak performance. A further analysis and industry comparison of Hershey is found throughout the following. Hershey Co. Background Hershey was founded in 1894 by Milton Hershey in Lancaster, Pennsylvania. In 1927, after thirty-three years of establishing and expanding his product lines, Milton Hershey decided it was time to go public and offer shares. Throughout the years, Hershey has continued to expand the company beyond solely producing chocolate products. Hershey now owns companies such as San Giorgio Macaroni, Inc. and Delmonico Foods, Inc. After operating for over 100 years, Hershey has become a world leader in the manufacturing of chocolate and non-chocolate confectionary products. This well-established company has gone international by building plants in over ninety countries. Hershey continues to expand and enhance their client base (The Hershey Company). Hershey Co. Stock Analysis Hershey is among the leaders in the manufacturing of chocolate, but even more impressive is Hershey's financial status. In the past year alone Hershey's stock price has risen by almost $30 and over the past 10 years dividends have grown at a steady rate of 2.5%. To evaluate Hershey's dividend growth, I used Hershey's dividends from the year in which they began paying dividends (1985), to the present. I disregarded the first dividend paid because it was much higher

in comparison to the other dividends. Hershey pays dividends quarterly. To find the quarterly growth rate, I divided the dividend paid in that quarter by the first dividend paid and raised this number to 1/ the quarter. Once I found this I subtracted one to find the quarterly growth rate. Once I found the growth rate per quarter, I took an average of those values and determined an average growth rate of 2.74% over the past 28 years. To get a more current growth rate, I calculated the growth rate in the last 10 years to be 2.54%.

Moving onto Hershey's stock price, which can be referenced in figure 1, Hershey's stock price is $86.39, greater than twice the size of other companies in the industry, Mondelez International, Inc. and Tootsie Roll Industries, Inc., and much greater than Nestl?'s stock price as well. I was interested to see if Hershey's stock was undervalued or overvalued. I tried to find an industry discount rate and was unable to do so; therefore, I tried different discount rates to see which discount rate was closest to Hershey's current value. To find Hershey's actual value I multiplied the last dividend by one plus the current quarterly growth rate. I divided this value by the discount rate (the discount rate was divided by four to find the quarterly rate) minus the current quarterly growth rate. After reviewing the values at the different discount rate, I chose a discount rate of 12% since Hershey's stock price was closest to this discounted value. In addition I knew that the discount rate must be greater than the growth rate or you will get a negative number. At this rate of 12%, Hershey's stock was valued at $75.77. As you can see, Hershey's stock is selling for higher than the valued price and is overvalued. Since the stock is overvalued it would be unwise to buy now.

Hershey's profit margin is 10.45% and falls in line with their competitors: Nestle at 11.49%, Mondelez International at 7.93%, and Tootsie Roll Industries at 9.50%. All of these numbers can be reference in figure one. Hershey's market capital is $19.79B, which is about half

of the industry average. This is neither good nor bad. After reviewing the different P/E ratios, Hershey is ranked fourth in the industry at 28.03. To find the P/E ratio I divided the current price of $86.38 by Earnings per Share, 3.08, and found the ratio to be 28.03 as of June 20, 2013 (Yahoo Finance). A high P/E ratio means higher growth, which is a positive sign. The only caution I give is Hershey's P/E ratio is estimated to drop to 20.24 by 2015. This indicates that earnings growth will slow in the next two years (Zach Investment Research). Compared to its competitors and other companies in the industry, Hershey has high earnings per share at 3.08. Earnings per share gives you the theoretical lowest possible earnings. Since this is higher than most companies in the industry, this makes the stock more attractive. If this industry were to bankrupt then Hershey would be better off than the other companies in the industry. With a dividend yield of 1.90%, Hershey's stock looks even more attractive to investors. This yield indicates that you get a greater return on the stock then what you invested. Again Hershey is ranked third in its industry.

Aside from evaluating the stock, I analyzed the stability, liquidity, and risk of the company, which affect the stock. Payout ratio is an indicator of a company's stability. Hershey has a payout ratio of 52%; therefore, Hershey is a stable company that doesn't need to reinvest all of its money back into the company to grow. The company is at the point where it is able to pay back dividends as opposed to need to retain those earnings to invest in assets to generate growth in the company. A higher ratio can be riskier though due to the fact that it is harder to consistently pay back higher dividends. Hershey and Mondelez have similar Payout ratios, whereas Tootsie Roll Industries has a very large payout ratio. I also looked at Hershey's current ratio. At 1.46, Hershey's current ratio is above one indicating that the company is pretty liquid and readily able to pay back its obligations to lenders and investors (Investopedia). The last

financial aspect calculated was Hershey's risk. To find the risk, I used the Capital Asset Pricing Model. I used the Treasury bill rate of 2.52% as my risk free rate. The firm's return is 12% and I was unable to find a market risk so I used the 52 week change of 26.68% as the market risk. I subtracted the risk free rate from the market rate and got a risk premium of 24.16% I then subtracted the risk free rate from 12% to get 9.48%. To find beta, I divided 9.48% by 24.16% and found a beta of 0.39 for Hershey Company. S.W.O.T Analysis After reviewing the data and looking into current articles on Hershey, I put together a S.W.O.T Analysis.

Strengths: Hershey has continually outperformed the S&P 500. In addition, Hershey's projected earnings per share is almost twice that of its competitors.

Weaknesses: Compared to its competitors: Nestle, Mars, Mondelez, Hershey is not as strong on a global scale (Poulos). Only 10% of Hershey's sales come from outside the U.S (). Another weakness is the amount of long term debt that Hershey has compared to its competitors (). The more debt a company has, the more leverage. When a company has a year with high earnings per share then highly levered firms benefit, but when earnings per share are low, a company is better off being unlevered.

Opportunities: There are talks of a merger with another candy producing powerhouse, Nestle. If Nestle were to aquire Hershey, Nestle would be able to cut costs within Hershey and add value to the company (Poulos).

Threats: Hershey has been growing by 30% over the last couple of years and most companies don't continue this high growth for long. Hershey is expected to slow to an

11% growth, which could lead to a fall in Hershey's stock price (Smith). Hershey was also involved in a price fixing scandal in Canada, but many believe this will be a minor setback for this big name company (Huff Post). Conclusion From the analysis of Hershey's stock, I found that dividends grew at a steady rate over the past ten years, had high earnings per share, and a high P/E ratio compared to the industry. One of Hershey's greatest weaknesses is that they are not as strong globally, but if Nestle and Hershey merge that will drastically change. The merger will increase Hershey's global activity and cut costs. The only real threat I saw was Hershey's high growth cannot continue forever so when growth slows the stock price will most likely decline. Taking all of these factors into account, I would strongly recommend holding Hershey's stock. Right now is not a great time to buy because Hershey is at its peak performance so the demand for Hershey's stock is high. When stock demand is high the price increases. If you wish to invest in Hershey's stock I would recommend waiting until the stock drops in price, but for right now I would hold the stock because Hershey could very well go up in value for the time being.

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