About Hershey The company was founded by Milton S. Hershey in 1894 and is headquartered in Hershey, PA. Hershey has approximately 13,000 employees worldwide. It operates in the geographic regions North America and International (50 different countries). With more than 80 brands, Hershey produces chocolate and sugar confectionery products. 90% of its revenue come from the United States. Chocolate industry sales of the U.S. from 2013 – 2017 (in Billion $)
Hershey’s Products Its principal product groups include chocolate and confectionery products, gum and mint refreshment products, and pantry items such as baking ingredients, toppings and beverages. Its brands include Hershey's, Reese's, and Kisses.
Hershey’s Competitors Hershey has the largest share of the US Chocolate market. Its closest competitor is Mars (Mars, Snickers, M&M, Twix...). Threat of competition from Nestlé & Cadbury Schweppes (now part of Kraft Foods) is mitigated trough licensing agreements.
5Y Stock Comparison Competitors (HSY – Mars – Mondelèz – S&P500 – Nestlé)
Historical Financial & Value Drivers Historical Revenue5,671,009 6,080,788 6,644,252 7,146,079 7,421,768 COGS4,765,711 5,025,760 5,533,104 5,806,404 6,032,193 EBIT905,298 1,055,028 1,111,148 1,339,675 1,389,575 Taxes299, , , , ,131 EBT808, ,845 1,015,579 1,251,319 1,306,043 Implied Taxes 334, , , , ,496 NOPAT 570, , , , ,079 Depreciation 215, , , ,532 Fixed + WC Investment (10,652) (64,673) 115,697 (902,030) FCF 894, ,491 1,195, ,581 Value DriversHistorical Sales Growth6.57%6.74%8.48%7.02%3.71% Operating Profit Margin15.96%17.35%16.72%18.75%18.72% Effective Tax Rate36.97%34.68%34.92%34.43%35.15% Investment Rate1.5%8.9%-13.2%100.1% Cost of Capital (WACC)6.02% ROIC25.26%27.46%26.89%27.66% Sales Growth = (sales– sales -1 )/ sales n Operating profit margin = Sales / EBIT Tax rate = Taxes / EBT Investment rate = (FC+WC)/NOPAT ROIC = NOPAT / ((InvCapBeg+InvCapEnd)/2)
WACC – Capital Asset Pricing Model Book ValueMarket Value Debt 2,325,771 Equity 1,519,530 22,480,000,000 Total Debt and Equity 3,845,301 22,482,325,771 Capital structure of debt60.48%0.01% Capital structure of equity39.52%99.99% Total100.00% DEBT Credit rating (Moody AA)3.56% Tax rate35.15% After tax cost of debt Rd(1-T)2.31% EQUITY RF (30YR)2.49% β current beta <1 = more stable (1 = price moves with market) % Expected return8.00% MRP = expected return – risk free rate5.51% Re(1-t)3.90% CAPM = re = RF + β (MRP)6.0164% WACC3.2829%6.0159%
Forecast & Residual Period Forecast Residual Revenue 7,792,856 8,221,464 8,714,751 9,281,210 9,930,895 10,104,686 COGS 6,331,465 6,589,259 7,071,762 7,717,051 8,157,936 8,199,653 EBIT 1,461,392 1,632,204 1,642,989 1,564,159 1,772,959 1,905,033 Taxes 514, , , , , ,143 NOPAT 946,543 1,057,179 1,064,164 1,013,106 1,148,346 1,233,890 Depreciation 209,591 Fixed + WC Investment 47,327 74,003 31,925 (81,048) 45,934 74,459 FCF 1,203,462 1,340,772 1,305,680 1,141,649 1,403,871 1,517,940 PV 1,135,341 1,193,283 1,096, ,293 1,049,054 26,589,567 Value DriversForecast Residual Sales Growth5.00%5.50%6.00%6.50%7.00% Operating Profit Margin18.75%19.9%18.9%16.9%17.9%18.9% Effective Tax Rate35.2% Investment Rate5.0%7.0%3.0%-8.0%4.0% Cost of Capital (WACC)6.02% ROIC estimated29.00% Spread (ROIC – WACC) 22.98% Residual Growth estimated1.75% Residual Investment Rate calculated6.034%
Estimate of Corporate Value GROWTH RATE MODEL PV of Forecast 17% 5,378,245 PV of Residual or Terminal Value 83% 26,589,567 PV of All Future Cash Flows 31,967,811 Cash and Marketable Securies 471,985 Corporate Value 32,439,796 Value of Debt 22,480,000,000 Value of Equity Holders 22,447,560,204 Value per Equity Share
Summary In conclusion, Hershey Corporation will continue to be successful in the Chocolate and Confectioners Market. The emergence of business in Asia and continued growth in North America and Europe will keep the company on its path of steady growth. Chocolate is a staple that is consumed during all cycles of the economy and the brand name recognition and promise of Hershey will keep the company in good standing.
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