A u d r e y G o l d m a n
C h l o e B e l l e w o a r
M a r i a S h a r p e
J e n n a F i s c h e r
J e a n Z h a o
1

Introduction
………..……………………………………………………….3
Financial Analysis ………………………………………..……………..5-18
Cash Flow Adequacy Ratios ………………………………………….5
Liquidity Ratios ……………………………………………………..6-7
Vertical Analysis-Balance Sheet ……………………………………8-9
Vertical Analysis-Income Statement
……………………………..10-11
Trend Analysis
……………………………………………………….11
Market Strength Ratios
……………………………………………...12
Long Term Solvency Ratios ………………………………………….13
Dupont Analysis ……………………………………………………..14
Profitability Analysis …………………………………………….15-16
Coverage Ratios
………………………………………………….16-17
Horizontal Analysis
……………………………………………...17-18
Comparative Industry Analysis
………………………………………….19
Direct Competitor Analysis ……………………………….…………19
Market Capitalization ……………………………………………….19
Price per Earnings …………………………………………………..20
Revenue Growth …...………………………………………………...20
Competitor Stock Graph Comparison
……………………………….20
Profit Margin
………………………………………………………..21
Cash Flow to Sales
…………………………………………………..22
Investment Analysis …………………………………………………...23-25
DCF Analysis …………………………………………………….23-24
Buy-Hold-Sell Decision ……………………………………………...25
Bibliography………………………………………………………………..26
2

The Hershey Company began in 1894, just a subsidiary of Milton Hershey’s
Lancaster, Pennsylvania caramel company. But it came to pass that Milton Hershey the realized his future in the candy business lay in chocolate, not in caramels. By 1895,
Hershey was producing 114 different confectionaries in all sorts of shapes and sizes. At the time, chocolate was touted as a source of quick energy supply for athletes, in addition to being a cure for a sweet tooth.
At the start of the company, the logo was “the baby in the bean,” a small child in a cocoa bean pod. Although this logo changed many times in terms of the child’s hair and facial expressions, it was never fully replaced until 1968, with the logo that we are familiar with today.
While his company was successfully producing sweet chocolate products, Milton decided to develop and grow the milk chocolate field of candies. After years of research and development, in 1899, Milton finally became the first American to manufacture milk chocolate.
At the end of the century, Milton chose a rural town as his factory location and headquarters while other companies had settled in urban population centers and transportation hubs. There were three reasons for Milton to choose a small town in
Pennsylvania. Firstly, it was right in the heart of Pennsylvania’s dairy farming country, so it was close to the essential elements to produce milk chocolate: milk. Another reason was that this town was also near the port cities of Philadelphia and New York from which imported cocoa beans and sugar could be obtained. Lastly, the region was populated by industrious folk that he hoped would become the devoted workforce that he needed.
After the first World War, one of the main elements, the European beet sugar, became incredibly scarce. So, Hershey began sourcing from cane sugar plantations and constructing his own refineries in Cuba.
Many of the popular Hershey products that we love today were originally produced for bakers, and other businesses in the confectioner industry, and it wasn’t until later that they were reconstructed for the everyday consumer.
Hershey’s Kisses, one of the most successful products of Hershey, were innovated back in 1907. Since then, there are over ten different varieties of Hershey Kisses, such as dark chocolate, with almonds, and a mix of white and milk chocolate. Not long after, Mr.
Goodbar and Krackel bars came into the scene, adding a new experience to the regular chocolate bar.
In 1923, H.B. Reese, a former Hershey employee, decided to start his own candy company out of the basement of his home. He hit upon his greatest idea: a confection of peanut butter covered by milk chocolate. Since then, the Reese’s product line has grown to include Reese’s Pieces, the Nutrageous candy bar and Reesesticks. To date, The
Hershey Company owns the brands of Hershey’s, Reese’s, Almond Joy, Hershey’s Bliss,
Hershey’s Kisses, Kit Kat, Mounds, Pieces, Twizzlers, and York.
The Hershey Company
3

now carries on a significant international presence with operations in more than 90 different countries as well.
For the first time in 1927, Milton Hershey decided to take advantage of growth of the whole chocolate market by reorganizing his company and offering shares to the public. The initial stock offering in the new Hershey Chocolate Corporation consisted of
350,000 shares of convertible preferred stock, and the opening price was $61.50 a share.

JOHN P. BILBREY, age 55, has been a Hershey director since June 2011. He was elected President and Chief Executive Officer of The Hershey Company effective
May 17, 2011.
100 Crystal A Dr. Hershey PA 17033
Ending date of last fiscal year:
Dec 31 st
2012
Information for the Past Year as of April 2 12:12pm ET
4
Volume 327,213
Avg Vol 1,183,000
Mkt Cap 18.91B
Chocolate industry:
Top 3 competitors:
Mars, Incorporated
Nestlé S.A.
Mondelez International, Inc.

With regard to cash flow yield, the numbers are relatively low, meaning that investors may find Hershey stock less appealing than a company with a higher ratio, since they want to earn as much as they can for as little of an investment. So, for example, in 2011, where the cash flow yield was below a 1-to-1 ratio, investors would not want to invest. However, in 2012 the number had increased, making it slightly more attractive to people looking to invest in the company.
In terms of cash flow to sales, Hershey has experienced some fluctuations over the past five years, rapidly increasing, then steadily decreasing, and now on the rise again since 2011. Since the higher the number is, the more able a company is to turn sales into cash and grow as a result, this past fiscal year reflects Hershey’s growing ability to do so.
This means that Hershey has the ability to expand and grow as a company due to the fact that they are able to turn a fairly large percentage of their sales into actual cash due to possible lower costs during operating activities.
With cash flows to assets, the ratio reveals how much cash a company can generate relative to it’s size. So, in terms of this past year, Hershey was able to generate
10% more cash with respect to total assets than the year before, in 2011. That’s a significant amount of change that had been made, though as a trend, it is consistent with the fluctuations over the past 5 years. Compared to a 30% ratio, which is considered to be very good, Hershey is very close to that number, demonstrating it’s strength in terms of creating cash.
On the whole, in 2012, Hershey’s cash flows significantly increased relative to in
2011, which is a good sign, and may signal strong financial growth in the years to come.
5

Ratio 2012 2011 2010 2009 2008
Working
Capital
Current
Ratio
$640
Million
1.435
$880
Million
1.752
$710
Million
1.546
$479
Million
1.526
$75 Million
1.059
Accounts
Receivable
Turnover
Inventory
Turnover
15.426 times 15.401 times 14.167 times 12.247 times 10.887 times
5.569
times
5.632 times
5.810 times
5.502 times
5.668 times
Days’ Sales
Uncollected
23.661 days 23.700 days
25.764 days
29.803 days
33.526 days
Days’ Sales in Inventory
64.745 days 71.131 days 63.651 days 61.992 days 63.986 days
Accounts
Payable
Turnover
Days’
Payable
Operating
Cycle
7.202 times
50.680 days
7.209 times
50.631 days
8.800 times
41.477 days
11.117 times 14.275 times
32.477 days 25.569 days
139.882 days
139.139 days
130.064 days
128.976 days
123.492 days
Financing
Period
38.522 days 37.877 days 47.110 days 63.310 days 72.354 days
Total Asset
Turnover
1.450 times 1.401 times 1.426 times 1.452 times 1.270 times
Hershey’s accounts payable turnover rate has been steadily decreasing over the past 5 years. The 2012 rate of 7.2 times turned over, meaning that the company pays suppliers 7.2 times a period, is half of the 14.3 times paid in 2008. Moreover, the days’ payable rate in 2012 is twice that of 2008: whereas the company used to take 25.6 days to pay suppliers, it now takes 50.7 days. Both ratio trends support the notion that the company has been allowed a much longer period during which to pay its suppliers. A reasonable cause for this is Hershey’s strategy of entering into contractual agreements
6

with providers, which, for a set amount of time, require Hershey to acquire and pay for materials in exchange for fixed prices to avoid any harmful fluctuation. These agreements guarantee the payment of providers by Hershey and allow for an increase in credit period without much risk.
This increase in days’ payable also factors into the trends of the operating cycle and the financing period. The increase in the operating cycle to be about 140 days compared to the 123 days in 2008 would suggest a failure on the part of the company to quickly convert its product into cash, but in reality the higher number is driven by the longer days’ payable. Moreover, the days’ payable has driven the decrease in the financing period, which truly reflects the company’s ability to more efficiently convert its inventories to cash.
The company’s working capital and current ratios reflect a drop in assets compared to liabilities from 2011 to 2012. This change, however, is explained by a spike in assets in 2011. Between 2010 and 2011, current assets of Hershey increased by 2%, directly caused by a sharp increase in inventory of 21.6% (this is supported by the 7.5 day increase in days’ sales in inventory in 2010 compared to the relatively steady surrounding four years). Inventory then decreased by 2.4% although remained about 19% above 2010 inventory levels. Accompanying the decrease in inventory from 2011 to 2012 were a 5% and 15.5% increase in cash and equivalents and receivables, respectively, and a 3% increase in total current assets. This succession implies an increase in investment of inventory followed by a successful selling period most likely due to efforts to expand brands and markets abroad and domestically. Hershey is always dedicated to developing and marketing new product lines and existing brands, which has the possibility of leading to consistently stronger sales.
Hershey’s days’ sales uncollected is the lowest it has been in the past 5 years. The company seems to have stabilized itself at about 23.7 days for the past two years compared to the 33.5 days it took to collect from purchasers in 2008. Day’s sales uncollected is important when analyzing a company like Hershey that sells most products to distributors rather than directly to consumers. For instance, the two largest buyers on credit are McLane Company, Inc., a wholesale distributor, and Wal-Mart Stores, Inc., the only purchasers in the past few years to account for more than 10% of Hershey’s total accounts receivable. Further, the company’s accounts receivable turnover is the highest it has been in the past five years, meaning that Hershey is paid by its customers more frequently than past years. These two ratios show that despite high credit sales, the company has reduced its time between sales and collection of cash, reflecting the company’s standard of a good rapport with distributors and suggesting a solid credit approval system in the company. The high frequency of collection and low time between collections means that Hershey has an inflow of capital and has less of a need to rely on debt.
The inventory turnover and Hershey’s total asset turnover has been very consistent over the past five years and show a stability within the company’s performance.
7

2012 2011 2010
Cash and
Cash
15.33%
Equivalents
Receivables 9.71
Inventories 13.33
0 Other
Current
Assets
44.42 Total Current
Assets
Property,
Plant &
Equipment,
35.16
Net
Intangibles 4.25
Other Non-
Current
3.2
Assets
Total Non-
Current
55.58
Assets
Total Assets 100
Accounts
Payable
9.30
Short-Term
Debt
7.91
2.68 Other
Current
Liabilities
30.95 Total Current
Liabilities
Long-Term
Debt
32.21
14.08 Other Non-
Current liabilities
47.37 Total Non-
Current
Liabilities
78.32 Total
Liabilities
Preferred 0
15.73%
9.06
14.72
0
46.49
35.37
2.54
3.15
53.74
100
12.36
3.17
0
26.53
39.68
14.00
54.20
80.73
0
20.72%
9.13
12.50
0
47.07
33.72
2.88
3.78
53.16
100
9.62
6.69
0
30.44
36.07
11.58
48.48
78.92
0
2009
6.89%
11.15
14.12
0
37.78
38.04
3.14
4.98
62.23
100
7.82
1.07
0
24.75
40.76
13.62
55.43
80.16
0
2008
1.02%
12.25
16.30
0
37.00
40.14
3.43
----
63.00
100
6.86
12.05
0
34.95
41.43
13.89
----
90.37
0
8

Stock Equity
Common 21.89
Stock Equity
Common Par 7.58
Additional
Paid in
12.48
Capital
Cumulative
Translation
Adjustment
Retained
Earnings
0
105.89
Treasury
Stock
96.00
Other Equity
Adjustments
Total
8.11
54.11
Capitalization
Total Equity 21.89
Total
Liabilities
100 and Stock
Equity
19.25
8.16
11.13
0
106.58
96.60
10.03
58.96
19.25
100
21.13
8.43
10.18
0
102.34
94.85
5.04
57.14
21.13
100
19.58
9.78
10.73
0
112.77
108.15
5.51
60.33
19.58
100
----
----
9.69
0
109.38
110.32
----
----
9.63
100
9

2012
Sales
Cost of Sales
Gross Operating
Profit
Selling, General, and
Administrative
Expenses
Operating
Income before
100%
46.23
46.23
25.60
20.63
D&A
Depreciation & 3.16
Amortization
Interest Income .04
Total Income 16.72 before Expenses
Interest Expense 1.5
Pre-Tax Income 15.36
Income Taxes 5.34
Total Net Income 9.95
2011
100%
54.77
45.23
24.34
20.89
3.55
.04
17.43
2010
100%
53.97
46.03
25.22
20.99
3.48
.02
15.99
2009
100%
57.74
42.26
22.83
19.43
3.44
.02
14.39
2008
100%
65.75
34.24
20.91
----
----
----
11.49
1.6
15.83
5.49
10.33
1.7
14.27
5.27
10.46
1.7
12.66
4.44
8.22
1.9
9.59
3.52
6.07
The total net income as a percent of total sales of the company during the past few years reached a peak of 10.46% in 2010. In more recent years, the percent has decreased and fallen to 9.95% in 2012. The decrease is most likely caused by an increase in expenses by $220 million in 2012. This raised selling, general, and administrative expenses from 24.34% of sales in 2011 to 25.6% despite an accompanied increase in total sales. Much of the increased expenses can be attributed to Hershey’s new Next Century program; the company has recently funneled funds into efforts such as supply chain reorganization and production relocation, which fall into this expense category. These increases in expenses, however, are part of current intensive realignment efforts that do not necessarily reflect allocation of funds in the future of the company. Another substantial cause of the increase in expenses was amplified advertising efforts. In recent years and especially in 2012, the company has worked to promote more existing and new products to boost sales, a result which will most likely be felt in upcoming years.
The considerable decrease in cost of sales as a percentage of sales from 2011 to
2012 marks the lowest percentage of sales achieved by Hershey’s cost of goods sold in the past five years. This reflects an ability to keep costs reasonably low. Despite both sales and cost of sales increasing in 2012 compared to 2011, the decrease in cost of sales as a percentage of total sales shows more efficient use of materials and proficient cost management. This is undoubtedly also a result of the company’s Next Century program which champions competitive cost structure. The efficiency is also a result of fixed price contracts set between Hershey and raw material providers enacted at the end of the 2011 period. The agreements use stabilized prices to prevent harmful fluctuations and increases
10

in the market from affecting Hershey’s purchases. These contracts could have offset the effect of market price increases and allowed for more efficient purchases of goods in
2012.
2012 2011 2010 2009 2008
Net Income 163.92% 170.18% 172.32% 135.42% 100%
Cost of
Sales
70.31% 83.30% 82.08% 87.82% 100%
Base Period: 2008
Cost of Sales
Gross Operating Profit
Expenses
Operating Income before D&A
Dep. & Amort.
Interest Income
Cost of Sales
Gross Operating Profit
Expenses
Operating Income before
D&A
Dep. & Amort.
Interest Income
11

Ratio
Price-
Earnings per Share
Dividend
Yield
Earnings per Share*
2012
29.93
2.5%
$2.87
2011
22.71
2.7%
$2.72
2010
21.53
3.2%
$2.19
2009
19.14
3.3%
$1.87
2008
25.93
2.5%
$1.34
*Basic
Despite this $2.65 difference, we strongly encourage the purchase and holding of
The Hershey Company Stock. Hershey is recognizable brand name that is recognized worldwide. We believe that Hershey offers best balance of upside potential and limited downside risk in the industry. While it is more expensive than its peers, the multiple premium is no greater than usual and is warranted given the company’s attractive growth profile. The company expects a forty- to fifty million-dollar increase in productivity each year due to several drivers.
First and foremost is the strength of the U.S confectionary category, which remained resilient through the 2008-2009 economic crises. This is an indication that
Hershey can maintain its increasing gross margin and revenue growth despite economic turmoil. The company’s consumer-centric marketing bent has so far worked well in driving share gains. This gain can be attributed to higher ad spend rates, consistent lifts from TV advertising, and smarter marketing strategies that showcase individual Hershey products.
The top line is also being driven better efficiency, new products, and Rest of
World expansion. Hershey is currently in the process of expanding its brand portfolio in
China and making investments to support the move. Currently 30% of Hershey’s growth comes from its Rest of World Segment. By 2017 the company expects that the Rest of
World segment will drive half of growth.
Despite Hershey’s rather expensive stock price, over the last 3 years Hershey’s
P/E and EV/EBITDA ratios have bested the food groups by an average of 3.8x and 1.1x, respectively. These multiples are consistent with historical norms thus we believe they are sustainable .We are confident these margins will grow at a quick pace due to lower costs and a step up in cost savings. Continued innovation also benefits the company, which is expected to release its new “Kit Kat mini’s” and “Twizzler/Jolly Rancher Bites” products later this year.
In addition to new products, The Hershey Company has recently acquired
Brookside, a Canadian based company that specializes in real fruit juice filled chocolates.
The expansion of the small company should boost Hershey’s top line. If we assume that
Brookside sales double in 2013 (the co is doubling capacity) then it would add 1.7% to the top line.
The Hershey Company has over-performed this quarter with a top line stronger than expected. Sales were up by 10.7% versus the consensus estimate of 5.9%. Pricing also came through more fully than expected (up 10.9%) and elasticity was minimal with volumes down only 0.5%.
12

Ratio 2012
Debt to
Equity
Ratio
3.58
Interest
Coverage
11.27%
Ratio
Debt Ratio 0.783
Equity 21.9%
Ratio
2011
0.042
11.18%
0.807
19.3%
2010
3.74
9.28%
0.789
21.1%
2009
4.10
8.35%
0.802
19.6%
2008
10.32
6.03%
0.904
8.8%
In terms of Hershey’s debt to equity ratio, the company has been heavily relying on debt to finance the growth of the company, especially in 2008. This makes sense since that’s around the time in which the whole economy was slowed, and it may have become more essential for the company to grow in that way as opposed to through sales.
The debt to equity ratio has also grown significantly since 2011, where the amount of debt used to create earnings within the company was very low. By heavily depending on debt to finance company expenditures, the result could lead to bankruptcy, but it does not since income from investments and sales outweigh the debts. This is something that
Hershey should be very wary of over time, since not keeping track of debt and how strongly the company relies on them could lead to financial troubles.
When it comes to the interest coverage ratio, Hershey is very capable at paying off the interest on the debt that they owe. Generally a number of over 1.5% is seen as a good percentage, and that said company would not have difficulty paying interest on debt. Since Hershey’s percentages for the past five years have consistently been well over that 1.5% figure, they are much more capable of paying off those interests much more quickly than other companies may be able to.
For the debt ratio, Hershey’s debt is just slightly less than it’s assets for the past 5 years. The point at which debt was almost equal to assets was in 2008, which makes sense as a result of the struggling economy at the time. It would be better if Hershey’s debt was slightly less relative to it’s assets, but It has been on the decline for the past year or so, which is a good sign in terms of the company’s risk of being overrun by debt.
Lastly for long-term solvency ratios, the equity ratio reflects how much of the company’s assets are financed by stockholders as opposed to creditors. So, over the past five years, Hershey’s shareholders have been contributing more and more to the overall assets of the company. As long as a ROA is greater than the rate of interest paid to the creditors of the company, these percentages are sustainable for the company.
13

Year Profit
Margin
X Asset
Turnover
X Equity
Multiplier
= Return on
Equity
2012
2011
2010
2009
Net
Income
/ Sales
10.1
10.3
9.0
8.2
Sales / Assets
1.38
1.38
1.33
1.44
Assets /
Shareholders’
Equity
4.567
5.194
4.732
5.108
63.6%
74.1%
56.5%
60.5%
The Return on Equity numbers show us what percentage of Hershey’s stockholders’ equity is returned as net income. The ROE fell 4% in 2010 only to peak at
74% in 2011 and to fall 10.5% in 2012. We can examine the number more thoroughly through the three-step DuPont Analysis. The Profit Margin numbers show a general increase from 2009 to 2012 but appear to be leveling off close to 10.2%. This means that, as of the most recent numbers, Hershey is keeping one tenth of its sales as net income.
The company has done well, then, to maximize its revenues and control costs compared to previous years. The Asset Turnover rates are less progressive. Although Hershey was generating $1.44 of sales for every dollar of assets in 2009, the number has fallen below that mark for every year since. After dropping 11 cents in 2010 the company has managed to steady itself at $1.38 in the past two years. The company is, therefore, trying to regain an efficiency in using its assets that has been lost since 2009. The Equity
Multiplier is the least consistent of the three components. The numbers hover between
4.5 and 5.2 but have no apparent trend. The increases and decreases are caused by fluctuations in equity and assets; for instance, the 2011 spike was caused by a $50 million decrease in equity accompanied by an increase in assets. Conversely, the decrease in
2012 was caused by $191 million increase in equity, which eclipsed the effect of the increase in assets. The Equity Multiplier has remained rather high because of Hershey’s large reliance on debt to fund its assets. This incorporation of leverage into the company’s practices allows for more assets (bought through liabilities) and less equity needed to fund them.
We can see that the highest percentages of Return on Equity are driven by individual components. In 2011, Profit Margin and Equity Multiplier were both at the highest they have been in the past four years. These combined to produce the highest
ROE by a wide margin. Conversely, the lowest ROE of the four years was comprised of low numbers in all three categories.
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Profitability is the building block that demonstrates a company’s ability to produce enough earnings so that it can continue being financed. It is important that
Hershey can efficiently use its assets to generate money. As an overview, Hershey invested wisely in productivity and cost savings efforts to make their business model more efficient, which helped their profitability ratios increase steadily on the whole.
Operating efficiency and profitability is conveyed by profit margin and asset turnover. The former ratio increased impressively from a 2008 profit margin of 6.06% to a margin of 10.34% in 2011; there was a 4.28% increase. In 2012, the profit margin decreased only fractionally by 0.39%. This ratio means that Hershey earns about ten cents for each dollar of sales on its net income. This profit margin increase could be a result of an increased net income; decreased depreciation and amortization expenses factored into a higher net income. For example, accelerated depreciation in 2012 was about half as much as its 2011 value of $33 million. Asset turnover held a pretty steady value throughout 2008 to 2012. In 2008 asset turnover was 1.03 times, but then it increased to 1.45 times in 2009 and is still 1.45 times in 2012. This value represents how much sales are produced from the company’s assets. A high asset turnover is better in that it means the company efficiently uses its assets to generate sales, but Hershey’s value is not very high. For a higher asset turnover value, the net sales numerator must be greater than the average total assets denominator, so Hershey’s assets were too low in comparison to its net sales.
Regarding gross margin, Hershey does very well with its 2012 value of
46.23%, which was only 42.26% in 2008; this percentage has increased and decreased by about four percentage points alternating years until 2011 when it was 45.23% and continued the increase until 2012. Therefore, from each dollar of sales Hershey keeps about $0.46. So although the cost of sales increased from $3.5 billion in 2011 to $3.7 billion in 2012 due to higher input costs and costs for supply chain, it was offset by the net sales increase of $6.08 billion in 2011 to $6.64 billion in 2012. Net sales increased because of net price realization (adding 5.7% to the net sales increase) and a sales volume increase inside the United States and outside for international business. New products being introduced into the U.S. increased net sales by 2.2% and the Brookside acquisition contributed 1.9% of the increase. When comparing 2012 to 2011, gross margin increased due to price realization and supply chain productivity improvements. The company anticipates another gross margin increase in 2013 because of a positive outlook on
15

productivity, cost saving initiatives and the expectation of some major raw materials costs being lowered.
Hershey’s return on total assets ratio increases from 8.45% in 2008 to 16.58% in 2012; the most dramatic time period of this increase was from 2008 to 2009, where it increased to 14.45 which is a 6% increase. A high value is desired, because it means the company gets more money on less investments and assets. Hershey has each year generated more income with less investment needed, which is why Hershey is successful for this ratio. Although the 2012 value decreased, it did so insignificantly by 0.11%; we can attribute this positive 2011 and 2012 percentage change to the increased net income, which was explained for profit margin; the net income increased for reasons such as a decrease in depreciation and amortization expenses.
Finally, we conclude the profitability analysis with the payout ratio. The payout ratio is how much of earnings go to shareholders in the form of dividends. Hershey’s values are high, but have decreased over the years. In 2008 its ratio was a staggering
84.44%, dropped considerably to 60.41% in 2009, decreased by about five percent each year until 2011 where it was 48.35% and then increased a little to 51.63%. If this value was low, then Hershey would have retained more of its earnings rather than pay its shareholders in dividends. The value is this high, despite its drop over the five examined years, because its cash dividends paid out are too high in comparison to its net income, or because the net income is just too low in comparison to cash dividends. I would assume that it is due to cash dividends being too high, because they increased by $37,123,000 from 2011 to 2012 and net income increased by a smaller amount of $31,969,000.
Profitability is a key measure of how a business is doing and Hershey has seen continuous and steady growth on the whole throughout the last five years. The company seems to be operating efficiently to keep others willing to finance.
The cash debt coverage ratio measures a company’s ability to repay all of its liabilities in a certain year from its operations, which is why a company wants high value for net cash provided by operating activities or a lower value of average total liabilities; a higher percentage is consequently more appropriate. Hershey’s values have varied somewhat, usually changing about ten to fifteen percentage points a year going either up or down. In 2008 it started as 15.04% and finished as 29.95% in 2012, meanings the ability to repay has gotten better; still, the company’s trend has been inconsistent.
However, the greater impact comes from net cash from total operating activities. Since the highest values come from 2012 (29.95%) and 2009 (34.38%), we can see this is because the net cash from total operating activities was greatest with values of $1.09 billion and $1.07 billion and not the total liabilities, which are about the same across the broad from $3.72 billion in 2012 and $2.95 billion in 2009.
Times interest earned measures how well a company can cover their interest payments. A company must be able to at least pay its interest payments if not the total amounts of money borrowed. A larger ratio is less risky for creditors, so they will be willing to lend money to the company; when the number dips under 2.5 times then it is not considered safe for a creditor. The company’s values change quite a bit from 6.03 in
2008 to 11.27 in 2012, but even at its lowest in 2008 it does not run the risk of not being
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able to repay loans with interest. The increase in this value comes from a higher income before taxes and interest expense, not because of the interest expense on the denominator, because from 2011 to 2012 the interest expense increased due to more short-term borrowing because of obtaining Brookside and less capitalized interest that year. Since the interest expense went up but the times interest earned value increased despite it, the increase in income before taxes and interest expense must be the reason.
Debt to total assets signifies the percentage total of assets provided by creditors. A number that is too high means too much of the assets are financed by debt. Hershey’s values went down a great deal, 14.6% from 54.72% in 2008 to 40.12% in 2012. Since the percentage went down, we know that less of the assets are provided from creditors, although Hershey does have its own plan for how much debt it takes in. The percentage decreased from 2011 to 2012, though, from 42.85% to 40.12%. This change had to either come from an increase in assets or a decrease in debt. It could come from the debt because Hershey increased their short-term debt significantly from a 2011 value of
$42,080,000 to a 2012 value of $118,164,000 because it acquired Brookside, a confectionary company located in Abbottsford, British Columbia, Canada; however, their long-term debt decreased from $1.75 billion in 2011 to $1.53 billion in 2012 because of
Hershey’s reclassification of 5.0% Notes due in 2013 of $250 million. It also could be due to an increase in total assets, which increased from $4.41 billion in 2011 to $4.75 billion in 2012. The asset change can be attributed to an increase in goodwill and intangibles associated with acquiring Brookside, other assets increasing because of the expansion of manufacturing capacity to a Chinese affiliate, and property, plant and equipment increases because of $258.7 million in capital additions.
Comparative Balance Sheet and Income Statement
A number that needs explaining is for accounts receivable, which increased greatly by 15.49% in a year. Although this value seems relatively optimistic, a comparison to a net sales increase of 9.27% puts this value into a more negative perspective. Hershey’s net sales percentage should be greater in comparison to its accounts receivables percentage in order for the accounts receivable value to be considered more favorable.
The debt values on the comparative balance sheet also must be explained due to their uncommonly high or low percentage changes. Short-term debt increased by180.81% because of the acquisition of Brookside as mentioned in the earlier profitability analysis.
The current portion of long-term debt increased from 2011 to 2012 by 164.09% because
Hershey reclassified 5.0% of Notes to be paid in 2013 for long-term debt on $250 million. Long-term debt decreased by 12.44% also because of this same reclassification.
 The selling, marketing and administrative expense rose by a sizable
15.29% because of a focus and effort on marketing research, advertisements for new products being introduced, Brookside expenses and employee-related expenses.
Chocolate, like bread or tea, is a commodity that has been produced and consumed dating back for thousands of years, with the first recorded use around 1100 B.C. in Central
America. It has been involved in making drinks, food, and even used in ancient royal and religious events held by the Mayans and Aztecs.
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Upon introduction to Europeans around the 16 th
century, it immediately became a luxury product, with individuals hoping to make a profit off of it enslaving the natives of
Central and South America to harvest the cacao. This problem of using slave labor, or even just paying workers deplorably low wages in these countries continues to this day, prompting a strong fair-trade movement on behalf of cacao workers. This is an area that
Hershey struggles with, and has attracted heavy media attention over.
In the late 1800’s, through decades of fine-tuning the chocolate-making process,
Rodolphe Lindt invented the process of “conching,” where chocolate solids are heated and grinded simultaneously until the liquid is evenly distributed. This process made way for Milton Hershey to very affordably produce chocolate bars in mass quantities, revolutionizing the chocolate industry.
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In terms of market capitalization differences between Hershey and Nestle, Nestle far outperforms Hershey, probably for several reasons. Firstly, there was no industry standard to compare Hershey against, so it’s hard to say if it’s much larger or much smaller than the industry standard. But based on the information provided to us in this graph where we see Hershey compared with Mondelez International and Nestle, we can assume that it is much smaller than the industry in terms of market capitalization. Nestle and Mondelez International are two of the largest food processing companies in the world, if not the largest. Those two companies also produce other food products than candy, such as any Kraft or Nabisco product that is owned by Mondelez Int., or the many brands that Nestle owns, including having a large stake-hold in the seasoning market, yogurts, and even pet-care products. Since Hershey almost solely produces candy, it is understandable that the market capitalization would indicate a significant size difference compared to these two enormous food conglomerates. For this reason, I think it’s almost unfair to pin Hershey against them, since it’s by no means a direct comparison, as opposed to car companies that could be more equally comparable in terms of products produces.

Looking at the Price per Earnings ratio for stock, investors have much higher expectations for Hershey’s growth than both Mondelez International and Nestle, with
Hershey P/E at 29.19, Mondelez Int. at 16.83, and Nestle at 20.18. A company on average has a P/E ratio of 20-25, so not only are there high growth expectations for
Hershey, there are decidedly low growth expectations for Mondelez Int. and Nestle. By outperforming these other companies, it means that shareholders have high confidence in the growth potential of Hershey in the future. Hershey’s P/E ratio demonstrates that shareholders are more willing to pay more money per dollar of earnings that Hershey gains in revenue.
In terms of quarterly revenue growth, Hershey can only be compared to Nestle in this scenario, and it underperforms that company by 1%. While Hershey’s revenue grew
12% since the last quarter, Nestle’s revenue grew 13%. That’s not too bad for comparison with one of Hershey’s biggest competitors. However, when it comes to revenue in general for the year, Hershey only brings in about 6.7% of what Nestle does, and this is a direct result of the breadth of products that Nestle offers, as opposed to the limited scope of Hershey’s output in comparison
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Company 2012 Profit Margin 2011 Profit Margin
The Hershey
Company
Mondelez
International
Nestle Corporation
9.95%
8.65%
10.34%
10.48%
11.49% 11.3%
2011.
Each of the competitor companies of Hershey, as well as Hershey itself, have relatively low profit margins. Hershey is a slightly more profitable company in the past two years than Mondelez International, as demonstrated by the higher profit margin.
Though Hershey and Mondelez Int. have both had declines with respect to their profit margins, the Nestle Corporation has shown a slight increase.
These numbers demonstrate that for every dollar of sales made by each of the companies, they have gained their relative percentages of that number in terms of net income. So, for example, Hershey in 2012 gained, on average, 9.95 cents for every dollar made in sales by the company.
Since profit margin allows traders, shareholder, and the public in general to get an insight as to how each company’s control over their costs fare against one another, we can assume that companies with higher profit margins, where they are able to gain more in net income relative to net sales made, have greater controls over their costs. In 2011 and 2012, Nestle had a greater control on their costs as opposed to Mondelez and
Hershey, which slightly lost some of their control over costs. The lower the costs are, the higher the profit margins. Costs could be incurred during production, as a result of union strikes, natural disasters affecting production, advances made in technology that ease costs, or even just the hiring of new workers, thus increasing the amount of wages paid.
The better each of these companies are at controlling factors such as those, the more net income they will be able to receive from net sales, since it won’t then be subtracted out.
So according to this, Nestle has the greatest control of their costs in the past two years, followed by The Hershey Company this year, though it was the least able in 2011, and
Mondelez International least able to control costs in 2012, but the second most able to in
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Company 2012 Cash Flow to
Sales Ratio
16.48% The Hershey
Company
Mondelez
International
Nestle Corporation
11.2%
12%
2011 Cash Flow to
Sales Ratio
9.67%
12.62%
11.31%
With respect to the operations cash flow to sales ratio, Hershey is noticeably more financially well off. With the past year’s ratios for Hershey being a good 4-5 percent higher than it’s competitors, we can conclude that Hershey has a higher cash flow coming in from operations relative to the sales that are being made. Since a higher cash flow to sales ratio is better for a company, with less liabilities and debt, Hershey is better off than
Mondelez International and Nestle. This could be due in part to the fact that with larger companies, they are more likely to have higher costs and liabilities that limit the operating cash flow, as well as having to pay more wages to employees.
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The objective of a discounted cash flow is to predict the value of a company today based on projections of how much money it’s going to make in the future. DCF analysis says that a company is worth all of the cash that it could make available to investors in the future, in essence finding the “fair value” of the company. It is referred to as a
“discounted: cash flow because cash in the future is worth less than cash today. The DCF model we have created for the Hershey Company is an unlevered free cash flow using the
Free Cash to Equity approach. The model projects a five year forecast period, which we feel is appropriate given Hershey’s stability as a recognizable brand name. We have used the Gordon Growth Model to calculate terminal value in perpetuity and the Capital Asset
Pricing Model to calculate cost of equity.
At first glance, The Hershey Company’s DCF model is quite deceiving. The projected equity value per share is $81.83, which is $2.65 less than the share price on the valuation date. This would indicate that shares are trading at higher values than present, and the stockholders should consider selling the company’s stock. However, most analysts agree that The Hershey Company stock is currently overweight and shows high potential for future growth, indicating that stockholders should buy or hold their current shares.
This disconnect is due to several factors, including the conservative nature of our
DCF model and The Hershey Company’s future endeavors. One explanation for the low equity value per share reflected in the DCF model is the conservative nature of the model.
The model estimates the revenue growth rate will increase two percent over the next five years, from nine percent in 2013 to eleven percent in 2017. Other projections have forecasted the revenue growth rate to increase by as much as seven percent over the next five years, with a sharp increase in 2013 due to new products and strong marketing nd channels. We chose a conservative increase in growth rate of three percent that follows historical trends and is consistent with industry standards.
The growth rates of additional accounts including accounts receivable, inventory, accounts payable, capital expenditures, etc. also follow this conservative approach. The low equity value per share can also be attributed to our ambitious cost of equity of twelve percent, which is significantly higher than current market returns. Given the company’s consistent increase in price earnings per share and basic earnings per share we do not believe this percent is unrealistic. Although dividend yield is not as stable as we would like, these small changes could be the result of varying price per share over the past five years. These factors could account for the $2.65 difference between the price on valuation date and the equity value per share.
So, in conclusion, taking all of The Hershey Company’s financials, past as well as the predicted future, into account, we would recommend that shareholders either hold or buy more of the company’s stock.
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Works Cited
""Hershey's." The Hershey Company. The Hershey Company Board of Directors, June
2013. Web. 25 Mar. 2013.
Hershey's." The Hershey Company. The Hershey Company Products, June 2010. Web.
25 Mar. 2013.
"HSY: Summary for The Hershey Company Common Stock." Yahoo! Finance . Yahoo!,
1 Apr. 2013. Web. 03 Apr. 2013. <http://finance.yahoo.com/q?s=HSY>.
NYSE. "The Hershey Company Key Statistics." Yahoo! Finance . Yahoo!, 2 Apr. 2013.
Web. 3 Apr. 2013. <http://finance.yahoo.com/q/ks?s=HSY+Key+Statistics>.
The Hershey Company. "Hershey's." The Hershey Company | . N.p., June 2010. Web. 25
Mar. 2013.
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