Shippensburg University Investment Management Program

Shippensburg University Investment Management Program Hold Hershey Company (NYSE: HSY) 11.10.2020 Current Price: Fair Value: 52 Week Range: $153.24 $131.00 $109.88-161.83 Analyst: Steven Belmonte Email: [email protected] Target Price: $155.00 Sector: Consumer Staples Stock Type: Mid Core Industry: Food Products Market Cap: $29.05B

Key Stock Statistics Revenue (TTM) $7.95B Operating Margin (TTM) 20.5% Net Income (TTM) $1.07B EPS (TTM) $5.11 Operating Cash Flow (TTM) $1.70B Free Cash Flow (TTM) $1.37B Return on Assets (TTM) 12.84% Return on Equity (TTM) 62.56% P/E 26.9 P/B 16.3 P/S 3.7 P/FCF 17.0 Beta (5-Year) 0.26 Dividend Yield 2.3% Projected 5 Year Growth 6.78%

Company Overview: The Hershey Company, headquartered in Hershey, Pa., is a global confectionery leader known for bringing goodness to the world through its chocolate, sweets, mints and other great-tasting snacks. Hershey has approximately has 18,000 employees around the world who work every day to deliver delicious, quality products. The company has more than 80 brands around the world that drive more than $7.95 billion in annual revenues, including such iconic brand names as Hershey's, Reese's, Hershey's Kisses, Jolly Rancher, Ice Breakers and Brookside. Building on its core business, Hershey is expanding its portfolio to include a broader range of delicious snacks. The company remains focused on growing its presence in key international markets while continuing to extend its competitive advantage in North America.

HSY: The Hershey Company – Equity Research Report Steven Belmonte

Executive Summary: The Hersey Company has experienced an immense amount of growth from June 2018 to February 2020. During this time, HSY stock price raised 71.64% along with an increase in their annual dividend payment by 10%. This success can be directly attributed to steady revenue, net income growth, and a consistent payout ratio to reward shareholders. HSY financial performance was a result of top products like Reese’s brand which had over $2.5 billion in retail sales. The COVID- 19 pandemic has drastically impacted the financials and business model and demand for the product as the lockdowns around the world have happened. This report will demonstrate that The Hersey Company current stock price is a still at a perfect opportunity to hold.

HSY: The Hershey Company – Equity Research Report Steven Belmonte

Table of Contents

Company Overview……………………………………………………………………..1 Executive Summary……………………………………………………………………..2 Company Overview……………………………………………………………………..4 Business Segments……………………………………………………………………....4 Investment Thesis……………………………………...... 4 Economic Drivers………………………………………………………………..4 Consumer Staples Sector………………………………………………...5 Food Products Industry…………………………………………………..6 Company Specific Factors……………………………………………….7 Financial Analysis……………………………………………………………….8 Revenue Growth………………………...... 8 Operating Income (EBIT) Growth……………………………………….8 Dividend Payout Policy Growth………………………………………….9 Key Financial Ratio Analysis…………………………………………………….9 Time-Series Analysis……………………………………………………..9 Cross-Sectional Analysis………………………………………………....10 Fair Value and Target Price……………………………………………………....11 Growth Rate of EBIT……………………………………………………..11 WACC Calculation……………………………………………………….12 Valuation………………………………………………………………….12 Risks……………………………………………………………………………………....12 External Risks…………………………………………………………………….12 Internal Risks……………………………………………………………………..13 Recommendation…………………………………………………………………………14 References………………………………………………………………………………..15 Appendix…………………………………………………………………………………16

HSY: The Hershey Company – Equity Research Report Steven Belmonte

Company Overview Company’s traditional chocolate and sugar confectionery market position, as well as its The Hershey Company, together with its grocery and snacks market positions, in the subsidiaries, manufactures and sells US and Canada, including the development confectionery products. The company and growth of its chocolate and non- operates through two segments, North chocolate confectionery, refreshment, pantry, America; and International and Other. It food service and other snack product lines; offers chocolate and non-chocolate The majority of Hershey’s customers resell confectionery products; gum and mint the Company’s products to end-consumers in refreshment products comprising mints, retail outlets in North America and other chewing gums, and bubble gums; pantry locations worldwide. In 2015 approximately items, such as baking ingredients, toppings, 26% of the Company’s consolidated net sales beverages, and sundae syrups; and snack were made to McLane Company, one of the items, including spreads, meat snacks, bars largest wholesale distributors in the US to and snack bites, mixes, popcorn and protein convenience stores, drug stores, wholesale bars, and cookies. The company provides its clubs and mass merchandisers, and the products primarily under the Hershey's, primary distributor of Hershey products to Reese's, Kisses, Jolly Rancher, Almond Joy, Wal-Mart Stores. The International and Brookside, bark THINS, Cadbury, Good & Other, which is responsible for the Plenty, Heath, Kit Kat, Lancaster, Payday, Company’s operations in all other countries Rolo, Twizzlers, Whoppers, York, Scharffen where it currently manufactures, imports, Berger, Dagoba, Ice Breakers, Breath savers, markets, sells, or distributes chocolate and Bubble Yum, Skinny Pop, Pirate's Booty, Oat non-chocolate confectionery and other mega, Paqui, ONE, and Krave brands, as well products, including the Company’s as under the Pelon Pelo Rico, IO-IO, Nutrine, operations in China and other Asia markets, Maha Lacto, Jumpin, and Sofit brands. It Latin America, Europe, Africa, and the markets and sells its products to wholesale Middle East, along with exports to these distributors, chain grocery stores, mass regions. merchandisers, chain drug stores, vending companies, wholesale clubs, convenience Investment Thesis stores, dollar stores, concessionaires, and department stores. The Hershey Company This section of the report will provide an was founded in 1894 and is headquartered in overview analysis of HSY’s stock. The Hershey, Pennsylvania. Today Hershey analysis will contain key economic drivers, controls more than 40% of the US company specific finances, a valuation of confectionery market, and markets products Hershey Company stock using a discounted across Latin America, Asia, Europe, Africa, cash flow (DCF) model, and a technical and the Middle East. The Company trades a analysis evaluation. portion of its shares on the New York Stock Exchange. Key Fundamentals & Economic Drivers Business Segments The following sections will discuss the The Hershey Company has two main primary drivers affecting the Hershey business segments that focuses in North Company. These drivers include detailing America, which is responsible for the

HSY: The Hershey Company – Equity Research Report Steven Belmonte how the consumer staples sector and food underperformed the S&P 500 but follow s products industry. their trend lines.

Consumer Staples Sector

The consumer staples comprise companies whose businesses are less sensitive to economic cycles. It includes manufacturers and distributors of food, beverages and tobacco and producers of non-durable household goods and personal products. It also includes food & drug retailing companies as well as hypermarkets and *HSY vs. Sector vs. Industry 5-Year consumer super centers. Consumer staples are considered to be non-cyclical, meaning The above graph demonstrates the consumer that they are always in demand, year-round, staples sector against the Food Products no matter how well the economy is—or is industry along with the Hershey Company. not—performing. As such, consumer staples As shown HSY over the past 5 years has are impervious to business cycles. Also, outperformed not only their industry but their people tend to demand consumer staples at a sector as a whole topping 50.71%. relatively constant level, regardless of their price. Comprising nearly 70% of the nation’s gross national product (GNP), consumer spending holds a lot of sway over the economy. Economic growth and decline are typically led by consumer spending, which is cyclical.

*Sector Historical Business Cycle Performance

The chart above displays the sector’s performance during the early, mid, late, and recession stages of the business cycle. The *Sector vs. S&P 500 5-Year U.S. is currently projected to be in late recession stage as COVID-19 ravages the The graph above demonstrates the consumer economy but could go back into a recession staples sector against the S&P 500, changes with the increase in new cases along with the over the past 5 years. Historical data also U.S. Election and the stimulus package. The shows that the consumer staples sector tends consumer staples sector had a return of - to have return lower during difference stages 1.16% YTD while the food products industry of the business cycle. Consumer staples has a return of -4.38% compared against the sector over the past 5 years has 5

HSY: The Hershey Company – Equity Research Report Steven Belmonte

S&P 500 of only 1.21%. According to of more discretionary items, such as candy, historical data, the communication services are very dependent on sales outside the sector is a prime candidate for long-hold home. The fact that convenience store traffic investments as the U.S. enters early is down considerably has made it more expansion. difficult for companies such as Hershey’s. The pandemic may wreak havoc on Food Product Industry Halloween, and impact Tootsie Roll, too. Another matter to consider is the ability to Consist of Agricultural Products where navigate supply chain disruptions. This can companies that produce agricultural often be a problem beyond leadership’s products. This also includes crop growers control, but other times the quality of and companies that produce/process foods, management can influence a company’s but do not package, market or sell these ability to successfully execute through foods. And then the Packaged Foods & unusual conditions. More specifically, some Meats where companies produce packaged companies have outlined the costs to foods, including dairy, fruit juice, meat, comply with food processing safety poultry, fish and pet food. regulations. Also, some expenses are more of a one-time hit, while others have lasting effects.

Competitive Advantage

With looking at there competive advantge ranked amongst the top 5 in there industry sits just at number 4 with the leading in the teal is J.M Smucker Company which manfucators and markets goods and *Consumer Staples Industries beverage products. And as follows Mondelez internaliontal Inc. which is a nsacl compant The food products industry is third to last in as well as beverages; Campbell Soup YTD return while sitting at fourth in the list. Company then Kraft Heinz Company. When Within respect to the Coronavirus Impact looking at HSY 52-week change is down - and how it affected the eating habits all 1.60% and the third biggest market cap of around the world. Many companies provide $28.6B, and a divend yield of 2.34% a broad portfolio of food products to retail compared to KHC of 5.23% whos market cap consumers, such as grocers, as well as is at $37.4B foodservice (restaurants) customers. It is important that investors gain a sense of a company’s sales mix and the margin implications of shifting channel demand. Some companies, such as Campbell’s Soup, have much less exposure to restaurants and convenience stores. Conversely, purveyors

Company Specific Factors

With looking at the latest quarter, HSY grew products in export markets of Asia, Latin sales in North America (N.A.) (89% of 2019 America, the Middle East, Europe, Africa and sales) by 0.4%, despite the fact that HSY has other regions. This segment also includes major exposure to several distribution Hershey’s Chocolate World stores, as well as channels that remained soft due to the Covid- operations associated with licensing the use 19 pandemic, including convenience stores of certain of HSY's trademarks and products (15% of N.A. sales), travel retail, and food to third parties around the world. In 2019, service. The food, drug, and mass channel, approximately 30% of consolidated net sales which is where most of the elevated were made to McLane Company, Inc., one of consumer demand is, represents roughly 15% of HSY’s N.A. sales. In Q3, they expect a the largest wholesale distributors in the recovery in the channels that were softened in United States to convenience stores, drug Q2 and forecast additional price-related stores, wholesale clubs and mass growth to support overall organic growth if merchandisers, who is also the primary the COVID-19 sits where it is at certainly. distributor of HSY’s products to Walmart. With Halloween being a key season for HSY The key raw material in HSY’s products is and represents about 10% of total net sales. cocoa, including cocoa liquor, cocoa butter However, we note that about 50% of these and cocoa powder processed from cocoa products are typically purchased for self- beans. These products are purchased consumption (ex. candy bowls) while the directly from third-party suppliers, who other 50% represents trick-or-treating sales. source cocoa beans that are grown Trick or treating will likely look different this principally in Far Eastern, West African, year, but HSY expects consumers to find safe Central and South American regions. West and creating ways to remain festive. In 2019, Africa accounts for approximately 70% of the HSY’s sales the North America segment world’s supply of cocoa beans. HSY also uses approximated 89% of consolidated revenue substantial quantities of sugar, Class II and IV and the remaining 11% of sales were in other dairy products, peanuts, almonds and markets (about 84% of sales in the U.S. and energy in production. Most of these inputs the remaining 16% of sales are outside the for the North American segment are U.S.). Approximately 70% of manufacturing purchased from suppliers in the United capacity and 80% of total long-lived assets States. Internationally, HSY imports these were in the U.S. HSY’s two operating inputs from other countries. In October segments are North America and 2018, HSY completed the acquisition of International & Other. The International & Pirate Brands for approximately $420M, Other segment is combination of all other which includes the Pirate’s Booty, Smart operating segments that are individually not Puffs and Original Tings brands, from B&G material, including geographic regions Foods, Inc. In January 2018, HSY completed outside of North America. HSY has the acquisition of all the outstanding shares operations and manufacturing facilities in of Amplify Snack Brands, Inc. (“Amplify”) for China, Mexico, Brazil, India and Malaysia, $1.6B. Amplify is a company that owns primarily for consumers in these regions, several popular better-for-you snack brands and distributes and sells confectionery such as Skinny Pop, Oatmega and Paqui. In September 2019, HSY completed its HSY: The Hershey Company – Equity Research Report Steven Belmonte acquisition of ONE Brands, the maker of a billion, a slight increase of around $600 line of low-sugar, high protein nutrition bars, million. After calculating the average growth for a purchase price of $397 million, or rate in revenue over the past 5 years, it is approximately $325 million net of tax apparent that Hershey’s revenue has grown benefits. Although the snack bar segment is slowly 1.57% per year. While their average very saturated, in our view, low-sugar, high- growth rate in revenue over the past 10 protein snack bar is an attractive category years, has grown to 3.48% per year. Even in that is growing much faster than other snack the wake of the pandemic caused by COVID- bar sub-categories. This acquisition also 19, Hershey’s revenue has continued to allows HSY to compete more aggressively in increase, albeit by a smaller rate. In 2019, the morning snacking occasion where it has revenue was $7.986 billion. Compared to the historically been under indexed to. HSY’s revenue in the TTM of currently 7.947 2019 net sales grew 2.5%, a deceleration billion. Hershey has made the necessary from the 3.7% growth realized in 2018 due investments into the factors discussed in the to a 3.6% benefit from the Amplify and previous section, factors that directly affect Pirates Brands acquisition in 2018. In 2019, the performance of supply chain and U.S. retail takeaway, measured by IRI, manufactures risk with the pandemic. increased 2.5% for HSY. U.S. candy, mint, and gum (CMG) takeaway increased 2.6% in Operating Income (EBIT) Growth 2019, resulting in a slight market share gain. A similar story holds for Hersey’s growth in Financials Analysis operating income, also known as earnings before income and taxes, or EBIT. The This section of the report will focus on key importance of this measure is that it will be financials from the income statement, used in the valuation section of this report, balance sheet, and cash flows, all of which as EBIT growth is used in the FCFF are provided in the Appendix. discounted cash flows approach to valuation. HSY’s Revenue, EBIT, and Dividends over the past 5 years

2015 2016 2017 2018 2019 TTM Revenue Hershey’s EBIT has grown steadily over 7,378 7,440 7,515 7,791 7,986 7,947 (millions) the past 5 years. In 2015, operating EBIT income was $1.413 billion. In the most 1,413 1,243 1,531 1,700 1,717 1,632 (millions) recent twelve months (TTM), operating Dividends income is $1.632 billion. After calculating (per 2.32 3.34 3.66 5.58 5.46 5.11 share) the average growth in the past 5 years, Hershey’s EBIT growth comes out to Revenue Growth 3.97% per year. This means that over the past 5 years, Hershey’s has been able to Hershey has increased its revenue slighting increase their EBIT by an average of 3.97% in the past 5 years. Notably, its revenue has per year. This means that while Hershey’s grown every single year. In 2015, total revenue has been increasing, they have been revenue for Hershey’s was $7.378 billion. In able to keep their cost of goods sold and the most recent TTM, total revenue is $7.947 operating expenses to a minimum while still growing. Into the future, a similar prediction

HSY: The Hershey Company – Equity Research Report Steven Belmonte is evident as the revenue growth. While Time Series Analysis Hershey’s can expect a similar growth into the future, the outlook is very positive for First are liquidity ratios, which measure how their EBIT growth, as they are focusing more easily a firm can meets its short-term and more on their supply chain growth and obligations. acquisitions to stay ahead of customer needs. The current ratio divides current assets by current liabilities. Typically, this ratio should Dividend Payout Policy Growth be higher than one, meaning the company has more current assets than current Hershey’s has gone to great lengths to liabilities, and if it does, this is a good sign ensure that their dividend payout is steadily that the company has a high level of liquidity increasing as well. Over the past 5 years, and less risk of financial trouble. Hershey’s dividend growth has consistently improved, does meet the criteria of being over one, and even more so than their revenue and EBIT a steady growth in this category can be growth. In 2015, Hershey’s dividend per observed. In the latest quarter, Hershey’s share was $2.32 and grew in 4 years to current ratio is 1.31, which is relatively high, $5.46. After calculating the average growth which could be an indicator that HSY might of this dividend payout over the past 5 years, have a a lot of inventory or unnecessary it is apparent that the average growth is investments in current assets. 18.67%. To better compare this to the 5-year growth of revenue and EBIT calculated The quick ratio is similar to the current ratio, before, the 5-year calculation of dividend but it takes into account inventory, payout growth is also calculated. subtracting it from current assets. Hershey’s quick ratio is significantly lower than its Key Financial Ratio Analysis current ratio, indicating that the high current HSY’s Liquidity Ratios ratio is most likely due to a bloated Last inventory, which makes sense as Hershey’s 2015 2016 2017 2018 2019 QTR is still having the effects of the acquisitions. Current 0.83 0.95 0.96 0.3 1.05 1.31 Note that this ratio is still steadily rising. Ratio Quick HSY’s Financial Health Ratio (%) 0.43 0.46 0.47 0.49 0.53 0.77 Ratio 2015 2016 2017 2018 2019 TTM Cash & Short- This portion of the report will be divided into Term 6.48 5.38 6.85 7.63 6.06 10.8 Investment two distinct sections. The first is a time- Short-term 16.31 11.54 15.52 15.64 9.04 11.08 series analysis of HSY’s key financial ratios. Debt This will analyze historical trends within the Long-term 29.41 42.82 37.22 42.29 43.40 45.92 company over the past 5 years. The second Debt is a cross-sectional analysis of their key Total ratios, compared to the industry and close Stockholder’s 18.58 14.33 16.53 18.18 21.38 19.68 Equity competitors.

Next to be discussed are HSY’s financial

health ratios, which measure how a

HSY: The Hershey Company – Equity Research Report Steven Belmonte company finances its assets, as well as investments ratio are that divided by total measures its ability to meet financial assets. While this has fluctuated from 2015 obligations. to 2010, in the past two years Hershey has greatly increased its amount of cash on hand There is one possible reason why Hershey for TTM. amount of cash on hand is very has financed so much and that has been with promising for investors, and it provides a the three acquisitions made in the past 2 cushion in the face of a large amount of debt. years. Cash on hand is an important counter to large amounts of debt because it acts as a buffer to service debt if the company opts to do so. In other words, Hershey could use that cash on hand to pay off its debt if it came to it. The cash and short-term important in determining the risk of debt. Next to be discussed are HSY’s historical This ratio divides EBITDA by the interest profitability ratios. These ratios assess a expense. If it is decreasing, it is an indicator company’s ability to generate earnings in that Hershey’s has been decreasing its comparison to several different measures of EBITDA. As can be seen, HSY has more or less expenses. been decreasing this ratio.

The net margin divides net income by total HSY’s Profitability Ratios revenue. This is a typical margin to use when 2015 2016 2017 2018 2019 TTM discussing a company’s ability to turn Net Profit 6.94 9.68 10.42 15.11 14.40 13.50 revenue into earnings available for the Margin % shareholders. The trend for Hershey’s is one ROE % 41.82 80.73 92.05 101.77 73.28 62.56 of an increasing net profit margin. Every year EPS USD 2.32 3.34 3.66 5.58 5.46 5.11 since 2015, this margin has increased, ROA % 9.35 13.25 14.14 17.77 14.51 12.84 Interest meaning that HSY has done a good job at 12.14 12.96 12.10 10.60 10.08 9.51 turning its revenues into a growing profit. Coverage Return on equity (ROE) is the next ratio to note in this category. For Hershey there is Cross-Sectional Analysis high because total stockholder’s equity has been positive. In this section, key financial ratios for HSY will be compared to its main competitor, First, Hersey has offered a substantial Mondelez International Inc. (MDLZ) and the increase in earnings per share (EPS) over the industry. past year. From 2015 to 2019, the average Liquidity Ratios growth has been 18.7%. Second, Hershey’s HSY MDLZ Industry return on assets (ROA) has also been steadily Current Ratio 1.31 0.74 1.52 increasing. With the exception of 2019, ROA Quick Ratio 0.77 0.46 0.76 has been increasing every year. This Cash Ratio 13.08 4.16 0.14 indicates that Hershey use of debt has been effective in generating return against their As can be seen, Hershey’s is dominant in assets. Third, the interest coverage ratio is terms of its liquidity ratios. At a current ratio

HSY: The Hershey Company – Equity Research Report Steven Belmonte of 1.31, it beats MDLZ and the slightly under financing to generate a return for their the industry substantially, indicating that investors. Compared to the industries of HSY has a high level of liquidity. The same 4.1% and MDLZ’s 15%, it shows Hershey story goes for HSY’s quick ratio. Again, this beating its peers. ROA shows how well the indicates that Hershey’s could have a management of a company is using its assets bloated inventory, which could make it more to generate return as for Hershey’s 14.5% difficult to liquidate its assets. The cash ratio compared to MDLS’S 6.1% and an industry is very important for HSY because of the average of 4.1%. amount of debt being used to finance its operations along with having a lot of cash on Fair Value and Target Price hand in the case of a debt default. The industry as a whole has a very low cash ratio, The valuation of HSY will be performed using which makes it promise that HSY has one a FCFF model. It will be divided into three much greater. sections. The first will be an analysis of the Financial Health Ratio projected future growth rates for EBIT, HSY MDLZ Industry which is used in the calculation of fair value. Total Debt Ratio 0.79 0.58 0.57 The second will a calculation for the Interest Coverage 10.08 973.25 1.96 weighted average cost of capital (WACC), Ratio which is used to discount the value of the The financial health ratios for HSY are firm into present value in the FCFF model. promising compared to the industry. With a Finally, the valuation will be analyzed total debt ratio of 0.79, HSY is more than the industry. Compared to MDLZ, there HSY has Growth Rate of EBIT a higher debt ratio indicting that HSY uses debt more than MDLZ and the industry. The first step to valuating HSY stock is to However, HSY’S interest coverage ratio is arrive at an estimation for the growth rate of very promising. At 10.08, HSY has a very high EBIT for the next 10 years. Information on ability to cover its high amount of interest the EBIT of Hershey can be found on the with its EBITDA. Note that MDLZ has an income statement in the Appendix. HSY’s incredibly high coverage ratio. operating income in 2015 was $1.413 billion Profitability Ratios million, and in 2019 was $1.717 billion. This HSY MDLZ Industry yields an average EBIT growth over 5 years Profit Margin 14.4 15 4.1 (%) of 3.97%. it is clear that EBIT will continue to ROE (%) 72.9 14.6 6.7 grow. The valuation model that will be used ROA (%) 14.5 6.1 4.1 is a three-stage model. The first stage is a 5- HSY’s profitability ratios are also promising year period of high growth. Then, over the compared to the competition along with next 5 years, growth rates slowly taper there industry. With a profit margin of down, until it reaches the final terminal rate. 14.4%, this is substantially higher than the Being conservative in this valuation, instead industry of 4.1%but a little lower than MDLZ of using 10.68% as the high growth rate, 3% of 15%. When looking at HSY’s ROE of 72.9% will be used instead. The terminal projection their results are very promising. ROE is even more conservative, at 1%. It is better measures how well a company is using its to calculate this fair value using conservative

HSY: The Hershey Company – Equity Research Report Steven Belmonte growth rates, because it leaves room for is subtracted, leaving the value of equity of improvement. In effect, 3% will be used for $36.53 billion. This total is then divided by the first 5 year, then it will cascade over the the 147 million shares outstanding, arriving next 5 years, from 3% to 2.6% to 2.2% to at a fair value estimate of $247.81. With the 1.8% to 1.4%, until in the final term it current price of HSY stock being $143.00, the reaches the low end of the growth rate stock is currently undervalued by 73.29%. estimate, at 1%. Risks WACC Calculation It is important to discuss potential risks of WACC will be used at the discount rate to investing in HSY stock. This section will be calculate the present value of future cash divided into external and internal risks. flows to the firm. The calculation that is used us generated from www.finbox.com. They External Risks have used a margin of safety approach to this, which is appealing. It then takes the The outlook of the economy is one of the average of the WACC between a low and greatest risks to investing in HSY stock. Being high projection. All the calculations will be non-cyclical in nature, if the recession provided in the Appendix. The final value of caused by COVID-19 were to continue into the WACC is 7.0%, and this will be used as next year, it would still hurt HSY. The the discount rate for the valuation. consumer staples sector withstands these battles as a whole in a stage of economic Valuation decline, so HSY could follow that trend. Change in consumer spending and outlook As stated previously, the valuation method on candy and snacks could pose an external used is a 3-stage FCFF model. It uses a high risk for HSY. The transitions with people stage growth period of 5 years, a decreasing wanting healthier snack options Hershey’s growth stage of 5 years, and a terminal year. key acquisitions could help them in the long The WACC will remain constant throughout run with key brands. Another big external this model. factor could possibly be new environment regulations under Paris agreement (2016) could be a threat to certain existing product categories along with rising raw material can pose a threat.

Internal Risks

Hershey also faces some potentially internal risks while they do have a very strong brand The results of the valuation can be seen portfolio with a vast major of different food above. The full valuation model is provided products. They have been successful at in the Appendix. The value of the operating execution of new projects and generated assets of the firm was calculated to be good returns on capital expenditure by $32.13 billion. Then, net debt of $4.4 billion

HSY: The Hershey Company – Equity Research Report Steven Belmonte building new revenue streams. Along with department has able to achieve a high level this they have a great distributor & dealers of customer satisfaction among present where the dealers not only promote customers and good brand equity among the company’s products but also invest in potential customers. They have had great training the sales team to explain to the success in New Markets the expansion has customer how he/she can extract the helped the organization to build new maximum benefits out of the products. revenue stream and diversify the economic There free cash flows provide resources in cycle risk in the markets it operates in. the hand of the company to expand into new Only thing that could be a tremendous risk is projects. The high level of customer if they take on a new product that does very satisfaction the company with its dedicated poorly, but they have been ahead of the customer relationship management game and always things about the customer.

HSY: The Hershey Company – Equity Research Report Steven Belmonte

Recommendation

The IMP class should hold 20 shares of HSY stock.

• HSY stock is undervalued by 73.29%, with a fair value of $247.81 and a current market price of $143.94. o While we might have bought it at $146.41 in November of 2019 just a few months before the start of the pandemic • There is room for massive grow over the years if that will be slow or fast it is hard to determine with the current time period, we are in • They are one of the top candy company’s in the game and are taking on acquisitions that would better them in the near future with consumer buying.

HSY: The Hershey Company – Equity Research Report Steven Belmonte

References 1. https://money.cnn.com/quote/forecast/forecast.html?symb=HSY 2. https://www.marketbeat.com/stocks/NYSE/HSY/price-target/ 3. https://library.morningstar.com/v2/quote?id=0P000002NZ&typeid=ST 4. https://www.thestreet.com/r/ratings/reports/analysis/HSY.html 5. http://financials.morningstar.com/income-statement/is.html?t=hsy 6. https://www.thehersheycompany.com/en_us/investors/profile/stock-fundamentals.html 7. https://www.cleverism.com/company/the-hershey- company/#:~:text=Hershey%20aligns%20its%20operations%20into,responsible%20for%20the% 20Company's%20operations 8. https://rsmus.com/what-we-do/industries/consumer-products/food-and-beverage/2020-business- trends-for-food-and-beverage-companies.html 9. https://finbox.com/NYSE:HSY/models/wacc 10. https://www.macrotrends.net/stocks/charts/HSY/hershey/quick-ratio