Buy – Hold – Sell Analysis
Richard Blair
Collin Garr
Kevin Phelps
TABLE
OF
CONTENTS
Business Overview
3
The Hershey Company
Industry Overview
5
Financial Statements
7
Income Statement
Balance Sheet
Statement of Cash Flows
Ratio Analysis
11
Liquidity and Efficiency Ratios
Profitability Ratios
Long-Term Solvency Ratios
Cash Flow Adequacy Ratios
Hershey vs. Nestlé: A Comparative view
Analsysis Overview
Buy, Hold, or Sell?
The Hershey Company Buy-Hold-Sell Analysis
19
Bibliography
The Hershey Company Buy-Hold-Sell Analysis
20
Business Overview
Milton S. Hershey founded The Hershey Company in 1894. At the time
of its founding, Hershey’s was considered a subsidiary of the Lancaster
Caramel Company. Since its founding, The Hershey Company has expanded
its product market to approximately 60 countries globally, employing 14,800
people in the process. An entire “Hershey Empire” has
been created in the process with the growth of
Hershey, Pennsylvania growing exponentially with the
company, as well as Hershey Park (an amusement park)
and a “Hershey Brand” that is globally
recognized.
Hershey’s current president and CEO is John P. Bilbrey.
Bilbrey has had extensive corporate experience, considering
he has spent 20+ years with Proctor & Gamble. He has had quite a bit of
experience with international business, which has proven to be rather
beneficial to Hershey’s considering its rapid international growth.
The company benefits from the centralization of the
The Hershey Company Buy-Hold-Sell Analysis
Hershey’s President & CEO John P. Bilbrey
4
ISIC (International Standard Industrial Classification) 1543. As of 2013, Hershey
had $7.146 billion in revenue that can largely be explained by Hershey’s focus
on the American market before its international markets. Since America is
typically a great importer of chocolate, Hershey has a very large and loyal
national consumer base with which it preoccupies itself.
Looking at a graph of long-term fluctuations in the market price of
Hershey stock (HSY), one can ostensibly notice the reliance of the company
on consumer spending, as it suffers from its most major contractions during
periods of economic recession. The most recent economic developments
seem to hint at steadier market prices for Hershey in the immediate future.
The Hershey Company
Ticker – HSY
Price (as of 4/2/14) – 102.31
52-Week High – 108.84
52-Week Low – 84.84
MKT Cap – 23.1B
Shares – 223.81M
The Hershey Company Buy-Hold-Sell Analysis
5
The Hershey Company Buy-Hold-Sell Analysis
6
Industry Overview
The Hershey Company (HSY) falls under the Consumer Goods sector of
the economy. Consumer Goods, sometimes abbreviated as FMCG, accounts
for nearly 25% of the total share of spending in the economy by sector. This
large market share allows huge amounts of derivation within the market.
Hershey is specifically a member of the Confectioners branch of the
FMCG, specifically the ISIC 1543. This third tier classification simply categorizes
Hershey as a sugar and chocolate manufacturer. As of 2012, this particular
industry was worth approximately $35.9 billion. The ISIC 1543 itself is rather
centralized, with the largest few companies controlling the majority of the net
worth.
Moving forward, it is imperative to recognize a several factors in the
practicality of this particular market. FMCG as a sector is heavily dependent
The Hershey Company Buy-Hold-Sell Analysis
7
upon consumer spending and is heavily affected by cyclical economic shocks;
thus, current market data may be suffering as a result of the prolonged
effects of the Great Recession.
Despite this economic phenomenon, the ISIC 1543 can look forward to
large projected growth in the industry as a result of emerging markets.
Currently, Europeans consume the largest amount of chocolate, 17 pounds
per capita, and Americans aren’t far behind, consuming more than 11 pounds.
However, where the market may see tremendous growth is in Indian and
other Asian markets. From 2013-2018, the annual growth rate of the Indian
chocolate market alone is estimated to hit 21%.
* It is also worth noting the reliance of the ISIC 1543, and all chocolateproducing corporations, on the cocoa bean. As emerging markets develop, a
The Hershey Company Buy-Hold-Sell Analysis
8
taste for chocolate products will cause a scarcity of the bean itself and in turn,
prices will rise. Raw material costs of producing a generic chocolate bar have
risen an astounding 28% within the last 20 months, and the cost of cocoa
butter itself has risen nearly 63%. Long-term weather changes, as well
sociopolitical and economic tensions in Africa (a major bean producer), may
continue to result in even higher costs.
The Hershey Company Buy-Hold-Sell Analysis
9
Financial Statements
Income Statement
(In Millions of $)
Gross Profit
Income from Operations
Net Earnings
2012
2011
2010
2,859.9
2,548.9
3,255.8
1,111,148
1,055,028
4,765,711
660,931
628,962
509,799
The Hershey Company’s gross profit has increased each year since 2010
because the company has maintained its production of Hershey staples such
as Hershey Bars and Hershey Kisses while developing new products such has
Reese’s Pieces and Jolly Ranchers. The Hershey Company focuses on retaining
its entrepreneurial attitude and strongly values innovation.
The Hershey Company Buy-Hold-Sell Analysis
10
Hershey’s income from operations was up 1% in 2012 compared to
2011. This is not necessarily surprising given the slow growth of the economy,
as well as Hershey’s recent investments in new factories and factory
equipment, which may take several years to become profitable. Over the past
few years, Hershey’s income from operations has risen, so an inconsequential
increase is not worrisome as of now, but Hershey executives and investors
should certainly be wary.
Hershey’s net earnings increased in 2012 in comparison to 2011 in part
because of the expansion of the Hershey brand. Hershey had previously relied
solely on its North American market but increases in foreign sales
demonstrate Hershey’s success thus far internationally and the Company’s
ability to further expand in Asia and Europe.
The Hershey Company Buy-Hold-Sell Analysis
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*When conducting this financial analysis, The Hershey Company’s Annual
Report to Stockholders/Form 10-K had not been released for the years 2013
and 2014.
Balance Sheet
(2012) (In Millions of $)
Assets = Stockholder’s Equity + Liabilities
4,754,839 = 1,048,373 + 3,706,466
(2011) (In Millions of $)
Assets = Stockholder’s Equity + Liabilities
4,407,094 = 880,943 + 3,526,151
The Hershey Company Buy-Hold-Sell Analysis
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Statement of Cash Flows
(In Millions of $)
Gross Profit
2012
2011
2010
2,859.9
2,548.9
3,255.8
1,111,148
1,055,028
4,765,711
660,931
628,962
509,799
Income from
Operations
Net Earnings
Hershey is currently in the process of financing a moderate amount of
its growth with debt as a result of the expenditures needed to expand.
Hershey has developed new machinery and updated old machinery that
makes its products more efficiently which yields a better overall product.
Income from operations is much lower than that in 2010, which may be a
symptom of this expansion, but this decrease is still a concern for Hershey
executives and investors. Alternatively, net earnings have increased, which
The Hershey Company Buy-Hold-Sell Analysis
13
could point to increased efficiency or lower costs in the manufacturing
process.
Though Hershey has a lower amount of income from operations and a
lower amount of Gross Profit (comparing to 2010), its high net earnings still
allows the company to yield relatively high dividends, a total of $1.81 in 2013.
This growth is encouraging especially since Hershey’s dividend returns have
progressively increased in recent years. These factors demonstrate that
Hershey is a strong company, yet Hershey should be cautious of a drastic
negative turnaround if markets are not favorable.
The Hershey Company Buy-Hold-Sell Analysis
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Ratio Analysis
Liquidity and Efficiency Ratios
Ratio
Formula
Current
Current assets
Ratio
Current Liabilities
Acid-test
Cash+Short-Term Investments+Current Receivables
ratio
2011
2012
2013
1.76
1.44
1.77
0.93
0.81
1.13
15.40
15.44
15.22
6.00
5.90
5.98
Current Liabilities
Accounts
Net sales
Receivable
Average Accounts Receivable, net
Turnover
Inventory
Turnover
Cost of Goods Sold
Average Inventory
The Hershey Company Buy-Hold-Sell Analysis
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Days’ sales
uncollected
Average Receivables, net
X 365
23.70
23.65
23.99
60.81
61.83
61.04
1.40
1.45
1.41
Net sales
Days’ sales
Ending Inventory
in
X 365
Cost of Goods Sold
inventory
Total asset
turnover
Net sales
Average Total Assets
Hershey’s liquidity and efficiency ratios demonstrate that Hershey is in a
decent position of liquidity. The current and acid test ratios are relatively low
but have remained fairly steady with the exception of a minor decrease in
2012; however, the acid-test ratios are much lower than the current ratios.
This is not concerning though because much of Hershey’s assets lie in
inventory, which is ideal for a company that is a confectioner.
The Hershey Company Buy-Hold-Sell Analysis
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Hershey’s accounts receivable turnover and inventory turnovers are
impressive, as well. Over the three-year span observed, the company has
collected its receivables and converted them to cash in excess of 15 times a
year, on average. Meanwhile, inventory turnover has hovered at or slightly
below 6 between the years 2011-2013. Given the massive candy inventory
that Hershey maintains, this is not altogether surprising. Days’ sales
uncollected and days’ sales in inventory are related to Hershey’s accounts
receivable and inventory turnovers, but its statistics surface in a different
manner. Hershey collected its receivables between 23.65 and 23.99 days over
the past three-years, while Hershey turns over its inventory once every 60.8161.83 days during the same three-years. Total asset turnover is a means that
represents a company’s efficiency, demonstrating how well a company uses its
assets to generate sales; Hershey’s total asset turnover fluctuated between
The Hershey Company Buy-Hold-Sell Analysis
17
1.40 and 1.45, which is representative of it’s sector since Hershey has a
smaller base of assets but high sales volume. The ratios discussed represent
Hershey’s overall consistency as a company and its emphasis on maintaining
it’s inventory healthily to generate revenue and increase total assets.
Profitability Ratios
Ratio
Profit margin
ratio
Gross margin
ratio
Return on total
assets
Return on
Formula
2012
2013
10.34
9.95
11.47
41.64
43.04
45.91
14.48
14.42
16.23
71.83
70.10
62.12
Net income
Net sales
Net Sales - Cost of Goods Sold
Net Sales
Net income
Average Total Assets
Net income - Preferred Dividends
common
stockholders’
2011
Average common stockholders’ equity
The Hershey Company Buy-Hold-Sell Analysis
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equity
Book value per
common share
Basic earnings
per share
Shareholders’ Equity applicable to Common Shares
3.81
4.63
7.17
2.74
2.90
3.61
Number of Common Shares Outstanding
Net income - Preferred Dividends
Weighted-Average Common Shares Outstanding
These figures show that Hershey has experienced profitability over the
last three-years. Similarly to Hershey’s liquidity ratios, the company’s profits
slightly declined in 2012, but in general Hershey’s profitability ratios in 2013
are much stronger than those in the preceding two years.
The profit margin and gross margin ratios increased significantly
between 2011 and 2013, from 10.34 to 11.47 and 41.64 to 45.91, respectively.
Increases in profit margin reflect an improvement in Hershey’s ability to retain
income from its sales. Hershey’s gross margin increase shows that the
The Hershey Company Buy-Hold-Sell Analysis
19
company is generating more revenue from its sales. Hershey’s progress with
its return on assets ratio has grown, as well. From 14.48 in 2011 to 16.23 in
2013, Hershey’s management surely improved its decision-making in
employment of assets to maximize profit.
Return on stockholders’ equity, book value per common share, and
basic earnings per share are more equity-focused but contribute to a
company’s profitability. Arguably, the most important of said ratios is return
on stockholders’ equity, which represents Hershey’s ability to take its
stockholders’ equity and convert it into net income. Here, a weakness from
Hershey’s profitability ratios can be recognized as the company’s return on
stockholders’ equity has declined for each of the past three-years, falling from
71.83 (2011) to 70.10 (2012), and finally sizeable decrease to 62.12 (2013).
However, the rise in book value per common share is attractive to both
The Hershey Company Buy-Hold-Sell Analysis
20
Hershey’s executives and stockholders because it shows the valuation of the
company’s shares has increased over the three-year period, nearly doubling
from 2011 (3.81) to 2013 (7.17). Basic earnings per share estimate the net
income that can be assigned to each share of stock. Once again, we see a
three-year increase in this ratio, a positive sign for Hershey as the company
moves into the future.
Long-Term Solvency Ratios
Hershey’s current Debt to Equity ratio is 1.22. This ratio falls in a modest
range of debt to equity ratios and would signify a moderate amount of
growth, which is financed by debt. These results are logical, given the reliance
of machinery in the process of creating chocolate. This dependence upon
debt to finance growth has increased in recent years, ranging from 2.3 to 1.8
The Hershey Company Buy-Hold-Sell Analysis
21
throughout the year 2012. These developments can be attributed to a $300
million dollar upgrade to one of its major plants, as well as the company’s
investment in the globalization of the Hershey brand since the company must
globally compete with other significant companies in the consumers goods
sector of the stock market such as Nestlé and Mars. Overall, Hershey’s debt to
equity ratio is encouraging, as it shows a rather steady rate of growth of both
equity and loans that contribute to the general growth of The Hershey
Company.
Current data for Hershey’s Debt to Asset ratio leads to a measure of
approximately 36.62%. This is a relatively safe measure, as it signifies a
moderately low amount of financial risk involved in the company’s workings
considering the amount of debt it has accrued with regard to its total asset
value. Assets would include the machinery needed to produce its many
The Hershey Company Buy-Hold-Sell Analysis
22
chocolate products, as well as the land and factories that Hershey owns. It
appears as though Hershey falls a bit short in comparison to Nestlé, an
industry/sector rival, whose current D/A ratio is about 18.05%, which could
potentially signify one of two consequences. First, Nestle may have less debt
that Hershey, and given a D/E of about .35, it is very possible that this
assumption is accurate. Second, Nestlé may posses more assets than Hershey.
Considering the size of Nestlé relative to Hershey and a total asset value
around $100 billion compared to about $6 billion, this hypothesis may be
accurate as well.
Currently, Hershey has an Interest Coverage Ration of about 17.44%.
This about falls just short of Nestlé’s coverage ratio of about 23.48% circa
2011-2012. Hershey could pay off about 17.44% of accrued interest with its
earnings before interest and taxes (EBIT), which is an acceptable course of
The Hershey Company Buy-Hold-Sell Analysis
23
action. Hershey would prefer that this ratio be higher and could be achieved
through greater earnings or by cutting of debt-based growth and expensive
loans to benefit both the company’s short and long-run growth.
Cash Flow Adequacy Ratios
Ratio
Formula
Free
Free cash flow per share X (% change from previous
cash
year)
2011
2012
2013
-66.67
250.13
2.53
-35.56
88.48
8.55
flow
ratio
percen Market Price per share
tage
growt
h
Operat
ing
Operating Cash Flow X (% change from previous year)
cash
flow
Net Sales
ratio
percen
The Hershey Company Buy-Hold-Sell Analysis
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tage
growt
h
After an unfavorable year in terms of cash flow ratios in 2011, Hershey
was able to make a very strong recovery in 2012 and remain steady in 2013.
The free cash flow ratio is a good indicator of whether a company is
profitable and it represents the residual money after the company’s
investment in capital. Hershey’s free cash flow ratio more than quadrupled in
2012. Operating cash flow, on the other hand, demonstrates nearly the
opposite effect. Operating cash flow is the cash that a company possesses
before making investments in its operations. This ratio nearly doubled in
Hershey’s booming year that was 2012. Having impressive figures in cash flow
The Hershey Company Buy-Hold-Sell Analysis
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ratios speaks to Hershey’s deft management of its cash before, during, and
after operations.
Hershey vs. Nestlé: A Comparative view
Before comparing both Hershey’s and Nestlé, we must first understand
the differences between the two. While Hershey and Nestlé produce many
similar products, Nestlé has a much wider base of products besides candy
including items from baby formula to bottled water. Thus, there may be some
rather distinct differences between the Hershey and Nestlé.
2011-2012
Hershey
Nestlé
Current Ratio
1.77
.91
Inventory Turnover
5.98
5.6
Profit Margin
11.47%
32.6%
Return on Equity
66.24%
16.47%
1.22
.339
Debt/Equity
The Hershey Company Buy-Hold-Sell Analysis
26
When studying the companies’ current ratios, it is recognizable that
Hershey would have no problems paying off its short-term investments
because of the value of the machinery Hershey controls. As a larger company
more varied producer of goods, Nestlé may have more difficultly achieving
similar results, though it is not unreasonable to suggest Nestlé would be able
to pay off debts because of generated revenue from multiple industries. In
terms of inventory turnover, Hershey and Nestlé are practically equal. Hershey
has a slightly higher inventory turnover ratio, but the difference between
Hershey and Nestlé in this regard does not drastically vary, which would
demonstrate strong sales of both Hershey and Nestlé products. Although,
Hershey possesses greater control of the United States’ market monopolize
given Hershey’s rather identification in America as a household name with
vast history and years of high quality to back its name. Nestlé, though, has a
The Hershey Company Buy-Hold-Sell Analysis
27
nearly three-fold advantage over Hershey in terms of profit margin. Since
Nestlé is varied as a company, it may be able to produce products other than
chocolate and candy to compensate for the costs accrued and drive down
production costs to rates significantly lower than Hershey’s. Despite this fact,
Hershey has a very high return on equity as compared with Nestlé, showing
that Hershey’s investor dollars yield greater results than they do with Nestlé;
by investing in Hershey, investors have more potential for economic reward.
Also, as previously discussed, Hershey’s higher D/E ratio is explainable by its
recent expansion and Nestlé has not experienced similar growth. Thus,
Hershey would be a more lucrative investment in relation to Nestlé.
The Hershey Company Buy-Hold-Sell Analysis
28
Analysis Overview
Buy, Hold, or Sell?
Currently, a buy of Hershey stock and a hold for the next few years
would probably yield the greatest results. Hershey’s stock would ideally be
held until the economy has begun to rise at higher levels than the market is
currently experiencing. By purchasing and holding Hershey, the buyer would
likely benefit substantially since Hershey is projected to increase moderately
for years to come. Hershey is currently expanding and has begun to finance
its growth with debt. As a result, Hershey’s debt-based ratios seem may be
inflated until the company can begin to utilize the advantages their
investments to grow further and profit. It is imperative to note Hershey’s high
return on equity and high liquidity, as well as the company’s ability to pay
these debts.
The Hershey Company Buy-Hold-Sell Analysis
29
We can conclude that all growth Hershey is undergoing has a justifiable
basis and investors should not be concerned about the company’s high levels
of debt in the short term, whether that concern results from analysis of
Hershey’s debt-to-asset or debt-to-equity ratios.
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The Hershey Company Buy-Hold-Sell Analysis
30
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<http://www.marketwatch.com/investing/stock/nsrgy/profile>.
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i
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