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4572000-228600Richard BlairCollin GarrKevin Phelps00Richard BlairCollin GarrKevin Phelpsleft250002514600Buy – Hold – Sell Analysis 900007300Buy – Hold – Sell Analysis -68580023749000 Table of ContentsBusiness Overview3The Hershey CompanyIndustry Overview5Financial Statements7Income StatementBalance SheetStatement of Cash FlowsRatio Analysis11Liquidity and Efficiency RatiosProfitability RatiosLong-Term Solvency RatiosCash Flow Adequacy RatiosHershey vs. Nestlé: A Comparative viewAnalsysis Overview 19Buy, Hold, or Sell?Bibliography 20Business Overview43434002743200Milton 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. 43434002245995Hershey’s President & CEO John P. Bilbrey00Hershey’s President & CEO John P. BilbreyHershey’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.-685800434340000The company benefits from the centralization of the 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 CompanyTicker – HSYPrice (as of 4/2/14) – 102.3152-Week High – 108.8452-Week Low – 84.84MKT Cap – 23.1BShares – 223.81MIndustry OverviewThe 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 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 chocolate-producing corporations, on the cocoa bean. As emerging markets develop, a 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.Financial StatementsIncome Statement(In Millions of $)201220112010Gross Profit2,859.92,548.93,255.8Income from Operations1,111,1481,055,0284,765,711Net Earnings660,931628,962509,799The 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.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.*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 + Liabilities4,754,839 = 1,048,373 + 3,706,466(2011) (In Millions of $)Assets = Stockholder’s Equity + Liabilities4,407,094 = 880,943 + 3,526,151Statement of Cash Flows(In Millions of $)201220112010Gross Profit2,859.92,548.93,255.8Income from Operations1,111,1481,055,0284,765,711Net Earnings660,931628,962509,799Hershey 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 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.Ratio AnalysisLiquidity and Efficiency RatiosRatioFormula201120122013Current Ratio83312034861400Current assetsCurrent Liabilities1.761.441.77Acid-test ratio-1714524828500Cash+Short-Term Investments+Current Receivables Current Liabilities0.930.811.13Accounts Receivable Turnover67119536195000Net salesAverage Accounts Receivable, net15.4015.4415.22Inventory Turnover113157031749900Cost of Goods SoldAverage Inventory6.005.905.98Days’ sales uncollected67119521018400Average Receivables, net X 365Net sales23.7023.6523.99Days’ sales in inventory67119531559500Ending Inventory X 365 Cost of Goods Sold60.8161.8361.04Total asset turnover113157022097900Net salesAverage Total Assets1.401.451.41Hershey’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. 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 60.81-61.83 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 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 RatiosRatioFormula201120122013Profit margin ratioNet income874395-127100Net sales10.349.9511.47Gross margin ratioNet Sales - Cost of Goods Sold41719510858500Net Sales41.6443.0445.91Return on total assetsNet income73787012446000Average Total Assets14.4814.4216.23Return on common stockholders’ equityNet income - Preferred Dividends50609512699900Average common stockholders’ equity71.8370.1062.12Book value per common shareShareholders’ Equity applicable to Common Shares-1397015239900Number of Common Shares Outstanding3.814.637.17Basic earnings per shareNet income - Preferred Dividends27432013969900Weighted-Average Common Shares Outstanding2.742.903.61These 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 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 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 RatiosHershey’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 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 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 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 RatiosRatioFormula201120122013Free cash flow ratio percentage growthFree cash flow per share X (% change from previous year)5207011430000Market Price per share -66.67250.132.53Operating cash flow ratio percentage growthOperating Cash Flow X (% change from previous year)55245444500Net Sales-35.5688.488.55After 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 ratios speaks to Hershey’s deft management of its cash before, during, and after operations.Hershey vs. Nestlé: A Comparative viewBefore 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.2011-2012HersheyNestléCurrent Ratio1.77.91Inventory Turnover5.985.6Profit Margin11.47%32.6%Return on Equity66.24%16.47%Debt/Equity1.22.339When 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 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.Analysis OverviewBuy, 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.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.Bibliography “Choc horror! Cocoa shortage, rising prices threaten chocolate bars.” NBC News. N.p., n.d. Web. 9 Apr. 2014. <;.“Chocolate and Sugar Production in USA: ISIC 1543.” Euromonitor International. N.p., n.d. Web. 9 Apr. 2014. <;.“The Chocolate Industry.” International Cocoa Organization. N.p., n.d. Web. 9 Apr. 2014. <;.“Hershey Co.” Google Finance. Google, n.d. Web. 9 Apr. 2014. <;.“The Hershey Company.” Morningstar. N.p., n.d. Web. 9 Apr. 2014. <;.“The Hershey Debt to Equity Ratio.” YCharts. N.p., n.d. Web. 9 Apr. 2014. <;.“Nestle SA.” Equities. N.p., n.d. Web. 9 Apr. 2014. <;.“Nestle S.A. ADS.” Market Watch. Wall Street Journal, n.d. Web. 9 Apr. 2014. <, David. “Hershey’s $300 million plant upgrade ensures a strong local workforce as the company grows globally.” Penn Live. N.p., n.d. Web. 9 Apr. 2014. < ................
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