Pdf the hershey company stock analysis report finance 305w

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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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