Hershey financial analyst report

Section: 2:00

Finance 367: Research Analyst Report

The Hershey Company Yi Yang; Pasquale Pacella

Yi Yang, Pasquale Pacella. Financial Analyst Report

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I. Brief Company Overview

The story of The Hershey Company begins with the tale of one inspiring and determined pioneer: Milton S. Hershey. From a farm boy who never received much education to the founder of the largest chocolate manufacturer in North America and a global leader in sugar confectionary with $16.05 billion market capitalization (43% share of the domestic chocolate market), Milton Hershey created a company that sells its products in 70 countries within North America, Asia, Europe, Middle East, and Africa. The more than100-year old company offers products, including chocolate and confectionery, snacks, mint refreshment and gum, baking ingredients, toppings, and beverages, under more than 80 brands. Some of its famous product lines include Hershey’s, Kisses, Reese’s, Twizzlers, Ice Breakers along with U.S. licenses for Cadbury, Caramello, Kit Kat, Rolo, and global licenses for York, Almond Joy, Mounds, Good & Plenty, Health, Jolly Rancher, Milk Duds, and Whoppers. In 2011, the firm generated 84% of its sales from the U.S. domestic market. The firm is currently employing 14,000 people worldwide. Hershey’s business model focuses on high volume and low margin. Majority of Hershey’s customers are wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires and department stores. In the year of 2011, Hershey’s sales to one of its largest customers McLane Company, Inc., accounted for 22.3% of Hershey’s total net sales. McLane Company, Inc. is the primary distributor of Hershey’s products to Wal-Mart Stores, Inc.

II. Chart or table summary of Merits and Risks

Risks Merits Relatively higher beta than competitors Higher return and Sharp Ratio than the industry

average Increasing in prices of key product ingredients, such as cocoa, peanuts, milk, sugar, etc.

Hedging against currency volatility and commodity price increase

Currency volatility of international operations Barrier to enter foreign markets Relatively low sales volatility compare to

competitors Greater competition due to increased consolidation activities in the confectionary industry

Relatively high growth compare to competitors (see key ratio analysis)

More long term debt than key competitors Strong customer relationships Difficulty of management control due to expansion into foreign markets

Powerful partnerships with suppliers

Increased marketing expense High brand reputation Dependence on key suppliers and customers High Involvement in the community

Dependence on domestic market


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III. Industry Overview-The Candy Manufacturing Industry The U.S. candy manufacturing industry has approximately 1,600 companies with combined annual revenue of $20 billion. Major companies include The Hershey Company, Mars, Tootsie Roll Industries, and Russell Stover Candies. Global wise, the candy manufacturing industry generates approximately $150 billion in annual revenue. The big key players outside the U.S. market include Nestle, Barry Callebaut, Cadbury (U.K. based, owned by U.S. company Kraft), Ferrero, and Meiji Holdings. Threat of new entrants Hershey has been a key player in the candy manufacturing Industry for more than 100 years. The threat of new entrants is low due to the existence of economies of scale. The Chocolate manufacturing industry requires large up-front capital investment. Consumers have established preference and trust for Hershey’s products; therefore, switching to different products may be costly. In addition, new entrants will not have access to distribution channels. Finally, the new players need to go through the scrutiny of government regulations and inspections, which is also costly. Bargaining power of buyers The bargaining power of buyers (wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires and department stores) is relatively low due the existence of buyers’ switching costs. In addition, Hershey has already built its brand value among consumers. The general public recognizes and relied on its products. Bargaining power of suppliers The bargaining power of suppliers is medium to high since the suppliers are concentrated. The key ingredients for Hershey’s products are milk, cocoa, peanut, and sugar. There are not many substitutes for these raw materials. The successful operation of Hershey largely depends on these suppliers. Threat of substitute products and services Hershey faces a high threat of substitute products and services due to several reasons. Firstly, Hershey specializes in manufacturing chocolate. It needs to compete with alternative flavors, such as vanilla. Secondly, the candy manufacturing industry faces intense competition with other types of snack manufacturing industries, such as Frito Lay. Finally, some retail industries can also compete with the candy manufacturers. For instance, candy especially chocolate is used as gifts during special holiday seasons. Hershey has to compete with flower stores, jewelry makers, and other retail stores (especially when people nowadays become more and more health conscious). Rivalry among competitors Although Hershey is one of the few candy makers that specialize in manufacturing chocolate, it still faces fierce competition with the big market players mentioned above. Some of these manufacturers not only manufacture well-known chocolate products, but also produce other popular candy brands. In addition, making chocolate does not require superior expertise, and the flavors can be easily replicated, Hershey may find it difficult to permanently lead the chocolate manufacturing segment. In spite of the intense competition among some key players, The Hershey Company is still America's largest chocolate company. It has already established itself as a cultural icon for brand innovation.


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IV. Detailed Company Analysis The Hershey Company reported sales revenue of $6.08 billion for the year ending December of 2011, which indicates a 7.2% increase from 2010, when the sales were $5.67 billion. Inspite of the economic crisis since 2008, the sales revenue at The Hershey Company has been increasing every year since 2006. The total sales revenue of The Hershey Company aggregates to $5.13 billion, of which 84.4% was generated in the U.S. domestic market. The company has been trying to expand into new markets. In 2011, sales in foreign markets were up 10%. In the past three years, The Hershey Company’s stock has been increasing in value. At the end of 2008, the stock price was $34.74 per share. The current stock price fluctuates around $70 per share. As of 09/28/2012, the company traded at 2.6 times its sales, 16.11 times the book value, 24.1 times its earning. These multiples were higher than most of Hershey’s competitors. The Hershey Company has been paying dividend for six consecutive years. For the 12 months ending 7/1/2012, The Hershey Company paid $1.49 dividend per share, which was equavalent to a dividend yield of 2.1%. Of the $6.08 billion sales reveue in 2011, cost of goods sold totaled $3.29 billion, or 54.1% of sales. The gross profit margin is slightly higher in 2011 than 2010, in which the cost of goods sold totalled 54.7% of sales. In fact, the 2011 gross profit margin is the highest of the past five years. The earning before extraordinary items at The Hershey Company in 2011 totaled $628.96 million, or 10.3% of sales which is higher than the 9% in 2010. Since 2008, The Hershey Company’s earnings before extraordinary items have increased by a total of 102%. However, the firm’s return on equity in 2011 (69.7%) was slightly lower than 2010 (70.8%). The company’s inventory aggregated $648.95 million as of December 2011. With $3.29 billion cost of goods sold in 2011, the firm turned over its inventory 5.1 times in 2011. In other words, The Hershey Company had 72 days of inventory on hand. This number is higher than the 63 days of sales in inventory in 2010. In the year of 2011, The Hershey Company incurred $32.20 million expense for resarch and development, which is equivalent to 0.5% of its sales revenue. In 2010, the firm’s R&D expense totaled $30.50 million, which is also 0.5% of the sales revenue. By December 2011, The Hershey Company had $3.50 billion total liabilities, of which $1.75 billion was long term debt. The long term debt to equity ratio of the firm was 2.00. The accounts receibale in 2011 were $399.50 million, which is equivalent to 24 days of sales, an improvement compare to the 25 days of sales in 2010. On 7/26/2012, The Hershey Company updated its sales growth to 7%-9% for the fiscal year of 2012. It also changed its expected earnings per share growth to 12%-14%, compare to the previous estimate of 10%-12%. Given the disappointing results of Hershey’s joint venture in India, Hershey Co. said it “agreed to buy out the minority shareholders in its loss-making Indian candy and beverage venture for an undisclosed sum,


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clearing the decks for the American firm to compete on its own in a market dominated by rivals Kraft Foods Inc. and Nestle S.A,” according to an article released by WSJ on September 10, 2012. The Hershey Company will buy the 43% stake in venture Godrej Hershey from India’s Godrej Industries Ltd. and another 6% from another unnamed minority shareholder, a press releases from Hershey and Godrej said. Hershey said it will assume about $47.6 million in debt along with the venture’s related manufacturing facilities, candy brands, and beverage brands. According to J.P Bilbrey, the president and chief executive at Hershey, since India is an important market, Hershey will make necessary investments in India to accelerate growth. For the fiscal year ended March 31, 2012, the venture had net sales of $69.73 million with losses of $13.37 million. However, The Hershey Company also expressed that it will not change the financial outlook provided by its second quarter earnings release. Overall, the company has been very confident about its further growth and expansion into new markets. Hershey’s past financial statements indicate that commodities and packaging make up 60% of the company’s cost of goods sold. The year of 2012 should proceed smoothly for The Hershey Company since the firm has been hedging against the commodity inflations for some key ingredents: cocoa, dairy, and sugar. However, the dairy market is highly illiquid and difficult to hedge. Given the dry weather across western Africa caused by El Nino, cocoa production may not be able to satisfy the global demand in the future. The prices of sugar have been extremely volatile compare to other agricultural commodities.

V. Investment Risks Historical Return and Risk1 We discovered that HSY, has yield a stunning 19% compounded annual growth rate in 2007-2012 whereas the industry average has a compounded annual growth rate of 8% within the same time span. In addition, the S&P 500 only has a yield of 3%.

The chocolate manufacturer has a very low beta, since it works in a consumer staple sector which is widely recognized as an anti-cyclical business. The unsystematic risk is even lower than the systematic one so we can conclude that HSY has low risk.

Both the Sharpe, Treynor and Sortino ratios are above the SP500 and the industry average, this means that HSY generated a return that

- justifies the overall risk taken by the investor (Sharpe ratio) - justifies the downside risk taken by the investor (Sortino ratio) - justifies the systematic risk taken by the investor (Treynor ratio)

The high relative risk (0.27 vs. 0.17 as average and 0.15 for SP5000) does not worry us because it is supported by an outstanding return. This means that a large portion of such relative risk is due to upside risk rather than downside risk.

1 Please refer to Appendix A


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Hershey’s Risk Factors2 As a candy manufacturer, The Hershey Company is exposed to the risks caused by volatile commodity prices. The company primary product ingredients include: cocoa, peanuts, milk and sugar.

To explore the sensitivity of Hershey’s stock prices, we ran a regression analysis3 on HSY’s weekly stock returns using the following as independent variables: weekly stock returns of competitors (Kraft Foods, Nestle, Tyson Foods, Tootsie Roll Industries, Kellogg’s), S&P500, cocoa, sugar, oil, and gold prices, as well as the option market volatility (VIX). We discovered that: HSY’s stock returns have a statistically significant positive correlation with the volatility in financial markets, the interest rates, and some big market players such as Kraft and Tyson Foods. Surprisingly, the prices of cocoa, the main ingredient used in Hershey’s products, do not have a statistically significant correlation with Hershey’s stock returns. This is a sign that the company has effectively managed to hedge against rises in prices of cocoa using derivatives. However, the company disclosed that the prices of peanuts are difficult to hedge due to the lack of liquidity of the peanuts derivative market.

The Hershey Company is currently holding manufacturing plants in Canada and Mexico. It generated 15% of sales revenue abroad in 2011. The firm is also trying to expand in China and India. Therefore, the company may face risks caused by volatilities of currency values. However, currency risk may not be a significant concern because the company disclosed that it has been using derivatives to hedge against it. Another risk of Hershey’s foreign market expansion plan is the possibility that many of those foreign markets might have already been breached by Hershey’s competitors. Finally the increased consolidation in the global confectionary arena (an example is Kraft’s acquisition of Cadbury) could lead to greater competitive pressure on HSY.

Assessing Default Risk Using Altman Z-Score4 The regular Z-Score for the food processing industry is 1.6. HSY has the highest Z-Score of 2.66, which far exceeds the industry average and the second-best company (Kellogg’s Z-Score: 1.79).

Business Risk, Operating, and Financial Leverage5 HSY’ sales volatility, computed as the coefficient of variation of sales revenues in the past 10 years was lower than its competitors (0.126 vs. 0.149). Its 2011 operating leverage was 0.118 which is much lower than the industry average (0.665). Thus we can conclude that Hershey has a relatively low business risk. The firm’s financial leverage might seem to be a matter of concern (2.06 vs. the industry average of 0.98). However Hershey was also able to generate a cash flow that is 11.8 times higher than interests in 2011. In addition, the interest rate paid on debt are equal to 5.15% (5.62% is the average), so we think that the company is using the leverage wisely to elevate the return for stockholders equity.

2 Please refer to Appendix B

3 Please refer to Appendix C

4 Altman Z-Score allows the estimation of a firm’s default risk. Please refer to Appendix D

5 Please refer to Appendix E


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VI. Investment Merits

Hershey has been generating remarkable high growth in stock price, sales, and earnings. At the moment, it is the leading player in the US chocolate segment, with a 45% market share, far exceeding its competitors. By cutting operating expenses through shutting down inefficient plants and reorganizing supply chains, and at the same time raising product prices, Hershey managed to keep a relatively high operating margin at 17.35% compare to the industry average of 10.59%. The firm’s merits can be explored in great detail through the financial analysis below:

Financial Ratios Analysis6

The firm’s productivity of labor and capital is one of the highest in the candy industry. Each HSY worker generates $459,268 of sales versus the industry average of $357,734. It has an asset turnover of 2x. In addition, the fixed assets turnover ratio is also higher than the industry average (4.06x vs. 3.80x). Looking at profitability, Hershey’s ROA, ROE, and ROIC are more than doubled the industry average. The firm’s ROE is especially outstanding, which is 72% compared to 24% of the industry average. The bad news comes when looking at the free cash flow ratios. It seems that HSY had some problems in turning sales and earnings into free cash flow. Giving a glance at FCF/Sales and FCF/Net Income, we deduce that for every $100 of sales only $3.84 was turned into cash while competitors are able to receive $7.01 for the same amount of sales. The firm’s liquidity does not worry us. Its quick ratio is far above 1x and quick ratio is roughly one. Both ratios are above the industry average. Looking at growth opportunity, HSY has one of the highest Capex/Sales ratios among its competitors. The sustainable growth rate, which depends on ROE and the payout ratio, is three times the industry average. We think the candy manufacturer, with its superb return on shareholders’ equity, should have solid growth rates in the future.

VII. Valuation DCF Assumptions and Results7 We presumed the 1928-2011 geometric average return on stock8 as market return, the 1928-2011 geometric average return on T-bills as risk free rate. We adopted the beta computed by Value Line9. The cost of debt has been calculated by dividing the LT interest by the LT debt. We estimated that the cost of

6 Using Mondelez, General Mills, Kellogg, Nestle and Tootsie Roll as peers, please refer to Appendix F 7 See Appendix I for the DCF valuation

8 Please refer to http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

9 We preferred to use Value Line beta because we think betas estimated by us and Yahoo Finance are too low

(0.05, 0.03, compared to 0.65 obtained by VL). It is likely that Yahoo Finance and we used data from S&P 500 to calculate the beta while VL did it with a broader stock index (maybe the Wilshire5000).

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html


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capital for Hershey is 6.83%10. We used 4% as the terminal value sales growth rate, which could be a little too high if Hershey will not successfully expand in China and India. For this reason we run a series of sensitivity analysis (i.e. we changed the growth rate to see its effect on predicted fair price). The 4% growth rate gives a fair stock price of $70.16 which is approximately equal to the current stock price (around $70). In calculating the terminal value, we assumed that HSY’s operating margin equals to the 2011 industry average. To compute the sales growth, operating margin, CAPEX rates, and net working capital in the period of 2012-2017, we used a linear fading model11.

LBO Valuation Model12 We used the Leveraged Buyout Valuation to determine the minimum price

for The Hershey Company. Our assumptions include: 1.4 as interest

coverage ratio, 3.61% as the risk free rate, and 5.62% as the market risk premium. We got $26.94 as the

floor price.

Multiples Valuation We used the following firms as comparables: Tootsie Roll, Nestle, Campbell Soup, Heinz Foods, Danone, Kellogg, and General Mills. They are all US-based firms which operate in the food processing industry. It is possible that our selected comps may not effectively help us predict Hershey’s performance. For instance, Nestle has a market capitalization of $210B while Tootsie Roll has a market cap of $1.57B. We think the presence the two firms may skew our analysis since the industry average market cap becomes $40B while HSY only has market cap of $16B. We ran a multiples valuation excluding Nestle and Tootsie Roll; however, we got a target price of $44.60. Considering Hershey’s current market price ($70), and its growth opportunities, we think the target price of $44.60 is too low. Hence, we decided to include Nestle and Tootsie Roll. It worth say that it would have been better to include Kraft and Mars13 as comparables; however, we could not find any public information about both companies.

10

Morningstar claimed HSY’s WACC to be 9%. Our result is not so different from that assumed by the firm, but we are sure about assumptions made by us. It is likely that Morningstar consider both/either higher market risk premium or lower risk free rate. 11

Please refer to Appendix G 12

Please refer to Appendix H 13

Mars is not publicly traded while Kraft’s key stats are not available on Yahoo Finance.

Market Return 9.2%

Risk-Free Rate 3.6%

Beta 0.65

Cost of Equity 7.5%

Cost of Debt 5%

% Debt 11.1%

% Equity 88.9%

Tax Rate 35%

WACC 6.83%

Hershey Average

Trailing P/E 23.65 18.64

Forward P/E 19.48 13.86

PEG Ratio 2.37 2.38

Price/Sales 2.51 1.59

Price/Book 14.95 5.11

EV/Sales 2.74 1.86

EV/EBITDA 12.56 11.05

Fair Prices

Forward P/E $ 68.38

Price/Sales $ 65.64

EV/EBITDA $ 73.69

Overall Avg. $ 67.14

Partial Avg. $ 68.38


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We found that it is a common practice among investment firms to use P/E and EV/EBITDA ratios when dealing with food and beverage companies. We calculated an average of fair value prices obtained using P/E and EV/EBITDA. We got $64.42, which is below the $72.59-$71.79 fair price estimated by our DCF and FCFE analyses.

Free Cash Flow to Equity Valuation We performed a FCFE Valuation using same assumption adopted for DCF analysis and we got almost the

same result obtained through DCF valuation. The predicted fair price for HSY is $71.79.14

VIII. Recommendation To sum up we have $70.16, $71.79, $68.68 as fair prices using DCF, FCFE and Multiple Valuation models

respectively. The average is $70.21. We are confident to assume such figure as our target price.

Hershey’s stock price was $70.12 as of October 24th, 2012. It does not seem to be much upside potential

for the stock. Therefore our recommendation is HOLD.15

Earlier in our DCF analysis we discovered that using a 3.5% pessimistic sales growth rate in the terminal

value leaded us to a fair price of $50.67 while a more optimistic 4.5% rate turned into a $86.57 fair price.

Therefore we suggest considering buy HSY when it is below $50.67 and consider sell it when it is above

$86.57

14

See FCFE Valuation Exhibit for more information. 15

We’re glad to see that we agree with other analyst’s opinions! Considering a set of 13 analyst reports we get $72.00 and $73.46 as mean and median target price and the mean recommendation is HOLD.

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Appendix I DCF Valuation Exhibit

2011 2012 2013 2014 2015 2016 Terminal

Sales $6,081 $6,550 $7,000 $7,436 $7,844 $8,216 $8,545

Operating Expenses 5,118 5,513 6,014 6,453 6,876 7,274 7,639

EBIT (Operating Profit) 963 1,037 986 983 968 943 906

Taxes 334 360 342 341 336 327 314

NOPAT 629 677 644 642 633 616 592

Depreciation 216 232 248 264 278 292 303

CapEx 324 349 331 330 325 316 303

Change in NWC 166 179 153 122 86 45 0

FCF $354 $382 $408 $454 $500 $546 $592

Terminal Value $20,899

Discounted FCF $382 $398 $410 $16,465

Present Value 17654.25

Plus Net Cash 567.30

Minus Long-Term Debt 1748.6

Minus Other Liabilities 617.276

Company Value 15855.67

Shares Outstanding 226

Intrinsic Value Per Share $70.16

Sales Growth

Fair Value

3.0% $50.18

3.5% $58.67

4.0% $70.16

4.5% $86.57

5.0% $111.95

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Appendix II Multiples Valuation Exhibit

Hershey Tootsie

Roll Nestle

S.A. Campbell

Soup H. J.

Heinz Tyson Foods Inc. Danone Kellogg Company General Mills Average

Market Cap 15.74 1.57 209.09 11.03 18.44 5.8 37.61 18.51 25.29 40.91

EV 17.34 1.51 224.27 13.51 22.37 7.47 45.95 26.52 32.56 46.77

Trailing P/E 23.65 34.73 19.93 14.6 19.48 12.09 17.21 15.75 15.31 18.63

Forward P/E 19.48 N/A 16.6 13.08 15.23 10.34 N/A 14.41 13.51 13.86

PEG Ratio 2.37 N/A 3.37 2.92 2.28 1.24 N/A 2.36 2.09 2.37

Price/Sales 2.51 2.94 2.25 1.42 1.58 0.18 1.43 1.39 1.51 1.58

Price/Book 14.95 2.37 3.49 12.16 7.1 0.99 2.33 8.59 3.83 5.10

EV/Sales 2.74 2.81 2.43 1.75 1.93 0.22 1.78 2 1.93 1.85

EV/EBITDA 12.56 19.04 13.04 9.09 11.08 4.73 10.31 11.41 9.66 11.04

EV/EBITDA Exhibit Average EV/EBITDA $11.045

EBITDA 1565

EV 17,285.425

Debt 631

Equity Value 16,654.425

Shares Outstanding 226

Fair Value $73.69

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Appendix III FCFE Valuation Exhibit

Year FY12 FY13 FY14 FY15 FY16 Terminal

Sales $ 28.85 $ 30.87 $ 33.03 $ 35.34 $ 37.81 $ 39.14

EPS $ 6.35 $ 6.79 $ 7.27 $ 7.77 $ 8.32 $ 4.15

Dividend $ 2.88 $ 3.08 $ 3.30 $ 3.53 $ 3.78 $ 2.07

Terminal Value 78.18397

PV of Cash Flow $ 2.71 $ 2.74 $ 2.76 $ 2.78 $ 60.81

Value of Stock $ 71.79

Sales per share from year just ended 26.96

FY1-5 Sales Growth Rate 7.00%

Profit Margin 22%

Return on Equity FY1-5 21%

Retention Rate FY1-5 55%

Payout Rate FY1-5 45%

Risk Free Rate for FY1-5 2.50%

Beta FY1-5 0.65

Market Risk Premium FY1-5 5.62%

Cost of Equity FY1-5 6.15%

Sustainable Growth Rate 4%

Profit Margin Sustainable 11%

ROE Sustainable 20%

Retention Rate Sustainable 50%

Sustainable Payout 50%

Risk Free Rate (Sustainable) 2.50%

Beta (Sustainable) 0.65

Risk Premium (Sustainable) 5.62%

Cost of Equity (Sustainable) 6.15%

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Appendix A Historical Return and Risks

HSY SP500 KFT NSRGY TR TSN K Ind. Avg.

CAGR16

18.98% 3.14% 10.80% 11.42% 3.55% 3.08% 3.05% 7.72%

St. Dev. 12.49 176.56 5.66 10.56 2.14 3.68 4.90 5.39

Relative Risk17

0.27 0.15 0.19 0.22 0.09 0.24 0.10 0.17

Beta 0.06 1.00 0.03 0.05 0.01 0.02 0.02 0.03

Sharpe Ratio 0.11 0.00 0.12 0.07 0.08 0.04 0.03 0.07

Sortino Ratio 0.0118 0.0001 0.0115 0.0070 0.0077 0.0039 0.0028 0.01

Treynor Ratio 24.01 0.15 23.53 13.14 24.84 8.79 6.20 15.30

Unsystem. Risk 2.46 0.00 0.75 1.14 0.90 0.69 0.71 0.84

Systematic Risk 10.08 176.64 4.92 9.45 1.25 2.99 4.20 4.56

16

Compounded annual growth rate calculated on the 2007-2012 period 17

Measured as coefficient of variation of the price during 2007-2012 period

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Appendix B Risk Factors Regression Analysis18

18

See appendix C for the regression results

-0,8

-0,6

-0,4

-0,2

0

0,2

0,4

0,6

0,8

1

1,2

COCOA SUGAR VIX OIL GOLD BARAGG

SP500 KFT NSRGY TR TSN K

Co

eff

icie

nts

Sensitivity to Risk Factors

-8

-6

-4

-2

0

2

4

6

8

COCOA SUGAR VIX OIL GOLD BARAGG

SP500 KFT NSRGY TR TSN K

t st

at

Statistical significance of Risk Factors

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Appendix C Regression Analysis

Regression Statistics

Multiple R 0.9850

R Square 0.9703

Adjusted R Square 0.9686

Standard Error 2.2204

Observations 221

ANOVA

df SS MS F Significance F

Regression 12 33582.27193 2798.522661 567.6104229 1.1661E-151

Residual 208 1025.51449 4.930358126

Total 220 34607.78642

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

Intercept -64.86084091 11.25493151 -5.762881883 2.95227E-08 -87.04920298 -42.67247885 -87.04920298 -42.67247885

COCOA 0.138334857 0.06022062 2.297134374 0.022606164 0.019613839 0.257055875 0.019613839 0.257055875

SUGAR -0.071810461 0.015971664 -4.496116545 1.14904E-05 -0.103297552 -0.04032337 -0.103297552 -0.04032337

VIX 0.183869137 0.027572169 6.668649757 2.28494E-10 0.129512408 0.238225866 0.129512408 0.238225866

OIL -0.10674579 0.034507482 -3.093409993 0.002250372 -0.174775036 -0.038716544 -0.174775036 -0.038716544

GOLD -0.021734356 0.011114303 -1.955530233 0.051859794 -0.043645479 0.000176767 -0.043645479 0.000176767

BAR AGG 0.67915478 0.129388702 5.24894963 3.76355E-07 0.424073408 0.934236152 0.424073408 0.934236152

SP500 0.022579161 0.005082202 4.442790839 1.44239E-05 0.012559931 0.03259839 0.012559931 0.03259839

KFT 1.017281359 0.162311987 6.267444419 2.08126E-09 0.697293882 1.337268836 0.697293882 1.337268836

NSRGY 0.17160718 0.083849134 2.04661839 0.041953245 0.006304091 0.336910268 0.006304091 0.336910268

TR 0.040825074 0.158226927 0.258015973 0.796649687 -0.271108973 0.352759122 -0.271108973 0.352759122

TSN 0.341994503 0.108512357 3.151664118 0.00186295 0.128069481 0.555919526 0.128069481 0.555919526

K -0.524606468 0.089108239 -5.887294773 1.5562E-08 -0.700277538 -0.348935398 -0.700277538 -0.348935398

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Appendix D Altman Z-Score

Appendix E

Business Risk, Operating and Financial Leverage

19

CV stands for coefficient of variation. 20

Computed as 10 years average of the ratio between the change of the EBIT out of the change of the sales.

HSY MDLZ GIS K NSRGY TR Average

Working Capital/Total Assets 0.20 -0.02 -0.01 -0.02 -0.02 0.18 0.05

Retained Earnings/Total Assets 0.07 0.02 0.04 0.05 0.03 0.04 0.04

Equity Mkt Value/Total Assets 0.24 0.07 0.13 0.17 0.00 0.07 0.11

EBIT/Total Assets 0.20 0.37 0.33 0.15 0.52 0.78 0.39

Sales/Total Assets 1.40 0.57 0.84 1.11 0.74 0.62 0.88

Altman Z-Score 2.66 1.02 1.51 1.79 1.07 1.57 1.60

Safe, Grey or Distressed Zone? Safe Distressed Grey Grey Grey Grey Grey

Financials HSY MDLZ GIS K NSRGY TR Average

Financial Leverage 5.2 2.66 3.29 6.76 2.01 1.29 3.20

Debt/Equity 2.06 0.66 0.96 2.86 0.11 0.01 0.92

Interest coverage ratio 11.8 7.6 6.7 23.5 12.6

Return on debt % 5.15 6.00 5.41 7.08 4.00 5.62

Business Risk

CV(Sales)19 0.126 0.211 0.157 0.159 0.109 0.109 0.149

Operating Leverage20 0.118 1.070 0.404 0.688 0.239 0.923 0.665

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Appendix F Financial Ratios Analysis21

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2011 Data obtained through Mergent Online

Financials HSY MDLZ GIS K NSRGY TR Average

Efficiency

Revenue per Employee $459,268 $430,897 $481,751 $431,303 $290,516 $244,204 $375,734

Asset Turnover (Average) 1.4 0.57 0.84 1.11 0.74 0.62 0.776

Fixed Assets Turnover 4.06 3.94 4.76 4.12 3.68 2.49 3.798

Profitability

Return on Assets % 14.48 3.73 7.88 10.37 8.41 5.11 7.1

Return on Equity % 71.83 9.93 24.51 62.84 15.99 6.58 23.97

Return on Invested Capital % 23.01 5.57 11.57 15.53 11.78 6.51 10.192

Free Cash Flow/Sales % 3.84 5.06 10.36 7.58 5.66 6.39 7.01

Free Cash Flow/Net Income 0.37 0.78 1.1 0.81 0.5 0.77 0.792

Liquidity

Current Ratio 1.74 0.88 0.96 0.91 0.95 3.64 1.468

Quick Ratio 0.93 0.45 0.47 0.5 0.66 2.31 0.878

Growth Opportunities

Cap Ex as a % of Sales 5.72 3.26 4.06 4.5 6.01 3.07 4.18

Payout Ratio % 50.4 58.3 51.9 49.4 61.1 31.6 50.46

Sustainable Growth Rate

36.2 5.79 12.72 31.04 9.77 2.08 12.10

Historical Sales Growth

3-Year Average 5.81 9.04 4.28 0.97 -8.7 2.39 1.596

5-Year Average 4.23 9.61 6.01 3.89 -3.21 1.43 3.546

10-Year Average 2.93 4.84 7.68 4.07 -0.13 2.32 3.756

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Appendix G DCF Assumptions

Actual Assumed using a linear fading model Assumed

2011 2012 2013 2014 2015 2016 TV

7.72% 6.97% 6.23% 5.49% 4.74% 4.00%

15.83% 14.96% 14.09% 13.22% 12.34% 11.47% 10.60%

34.68% 34.68% 34.68% 34.68% 34.68% 34.68% 34.68%

5.33% 5.03% 4.73% 4.44% 4.14% 3.85% 3.55%

3.55% 3.55% 3.55% 3.55% 3.55% 3.55% 3.55%

2.74% 2.74% 2.19% 1.64% 1.09% 0.55% 0.00%

Appendix H

Simple LBO Valuation Model

Simple LBO Valuation Model

EBIT 962,845,000.00

Interest Coverage Ratio 1.4

Interest 687,746,428.57

Risk Premium 5.62%

Treasury Bonds 3.61%

Enterprise Value 7,451,207,243.46

Total Price we can pay 9,314,009,054.33

Target Debt Amount 1,993,100,000

Total Excess Cash 567,300,000

After Paying off debt 5,458,107,243.46

Use Excess Cash 6,025,407,243.46

Shares Outstanding 223,654,520.00

Price Per Share 26.94

Hershey financial analyst report

Economy & Finance

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