The Hershey Company is more than 100 years old and has survived world wars, pandemics, depressions, and market crashes. The Hershey Company has outperformed the S&P 500 over the last few decades, and this trend could very well continue in the future. Is now the time to add The Hershey Company to your portfolio?
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in The Hershey Company. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of The Hershey Company either. Thus, I have no personal stake in The Hershey Company. If you want to purchase shares (or fractional shares) of The Hershey Company, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
The Hershey Company was founded in Pennsylvania, USA in 1894. It is an American multinational company and is the largest producer of high-quality chocolate in North America and one of the largest chocolate manufacturers in the world. The Hershey Company also produces a variety of other products, including cookies and cakes. They also offer beverages such as milkshakes and have recently expanded into the salty snacks market. The Hershey Company produces and sells over 100 brands in approximately 80 countries worldwide. Their most famous brands are the Hershey bar, Hershey's Kisses, and Reese's Peanut Butter Cups. These brands are what give The Hershey Company a moat. The Hershey Company reports in three segments. North America Confectionery accounted for approximately 82% of sales in 2023, North America Salty Snacks for around 10% of sales, and International for approximately 8% of total sales in 2023. The North American Confectionery segment consists of Hershey's traditional chocolate and non-chocolate confectionery market positions in the United States and Canada. This includes its business in chocolate and non-chocolate confectionery, gum and refreshment products, protein bars, spreads, snack bites and mixes, as well as pantry and food service lines, and retail operations such as Hershey's Chocolate World stores. The North American Salty Snacks segment consists of Hershey's salty snacking products in the United States. This includes ready-to-eat popcorn, baked snacks free of trans fats, pretzels, and other snacks. The International segment consists of sales in geographic regions outside of North America.
The CEO is Michele Buck. She joined The Hershey Company in 2005 and held several leadership roles within the company before assuming the position of CEO in 2017. Prior to joining The Hershey Company, Michele Buck held various positions at Kraft/Nabisco and at the Frito-Lay division of PepsiCo. She earned a bachelor's degree from Shippensburg University and holds a Master of Business Administration from the University of North Carolina. Michele Buck has been on Fortune's Most Powerful Women list every year from 2017 to 2021. One thing she is credited for as a CEO is diversifying The Hershey Company into the salty snacks market. She has made several acquisitions in this area, which could potentially drive future growth for the company. She prefers to define CEO as Chief Energy Officer and describes her role as infusing new energy and enthusiasm in employees to ensure the company achieves greater heights of success. It seems to work, as she has an employee score of 76/100 at Comparably, which places her in the top 15% of similarly sized companies. Her extensive experience, strong decision-making skills, and positive employee ratings make me confident that Michele Buck is the right person to lead The Hershey Company in the future.
I believe that The Hershey Company has a strong brand moat, and I also appreciate their management. Now, let us analyze the numbers to determine if The Hershey Company meets our criteria for having a strong competitive advantage. In case you want an explanation about what the numbers represent, you can refer to "MY STRATEGY" on the website.
The first number we will investigate is the return on invested capital, also known as ROIC. We require a 10-year history with all figures exceeding 10% for each year. These numbers are certainly encouraging, as The Hershey Company has managed to deliver a return on invested capital (ROIC) above 20% every year for the past 10 years. The Hershey Company hasn't been able to reach the heights they achieved in 2014, but I'm not worried about it because they have consistently delivered a return on invested capital (ROIC) above 20% every year in the past decade, which is impressive.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. The numbers are a bit mixed, as the equity decreased from 2014 to 2016. Since 2017, Hershey has managed to grow its equity every year, which is encouraging. Thus, despite Hershey's equity decreasing from 1.895 to 1.285 from 2017 to 2016, it has increased significantly over the past ten years, reaching 4.988 in 2023. Hopefully, this trend will continue.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising to see that The Hershey Company has consistently generated positive free cash flow every year in the past decade. The Hershey Company elevated its free cash flow to a new level in 2018 and has consistently maintained a free cash flow of over $1 billion annually since then. Free cash flow decreased in 2023 compared to 2022, partly due to higher commodity prices. I will get back to that later in the analysis. Levered free cash flow margin has consistently been above 15% since 2018, but decreased to 13,9% in 2023 partly due to commodity prices. Free cash flow yield is slightly above the ten-year average, which indicates that Hershey shares are neither cheap nor expensive. However, we will revisit this later in the analysis.
Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. We calculate this by dividing the total long-term debt by earnings. After performing the calculation on The Hershey Company, I found that the company has 2,04 years of earnings in debt. Given that it is well below the 3-year requirement, debt is not a concern for me. If I were to invest in The Hershey Company.
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Based on my findings so far, I believe that The Hershey Company is an intriguing company. However, no investment is without risk, and The Hershey Company also has its fair share of risks. One risk is competition. The Hershey Company operates in a highly competitive sector, competing with other high-quality chocolate manufacturers and private labels. Management mentioned that they have noticed other high-quality chocolate manufacturers increasing their focus on innovation. This means that The Hershey Company may need to introduce new products in order to stay competitive. Furthermore, people may choose to purchase private label chocolate during times of prolonged economic downturns. Management has mentioned that there have been some increases in private label sales in both confectionery and salty snacks due to the economic environment. Commodity Prices. The Hershey Company depends on commodities such as cocoa and sugar. Currently, cocoa and sugar prices are at historically high levels, and it appears that the prices will not decrease anytime soon due to a global drought affecting cocoa production. This drought is expected to continue due to the weather phenomenon El Niño, which brings hotter and drier than usual conditions to cocoa-producing countries. The weather is also expected to impact the sugar harvest, potentially causing prices to remain high for at least another year. Thus, higher commodity prices affected The Hershey Company's performance in 2023, with free cash flow and levered free cash flow margin being lower than in previous years. A decrease in demand for their products. We are witnessing a growing consumer trend towards health consciousness, fueled by mounting concerns about obesity and other health-related issues. If this trend continues, it could have an impact on sales for The Hershey Company in the future. Furthermore, although there is no indication of it currently, it is possible that the government may consider implementing a sugar tax in the future due to the health risks associated with sugar. We have also seen U.S. cities implementing a sugary drink tax, which could potentially be extended to other products. Furthermore, it is uncertain how the introduction of obesity drugs such as GLP-1 will affect The Hershey Company in the long term.
There are also numerous reasons to invest in The Hershey Company. One reason could be that The Hershey Company will perform well during economic downturns. Currently, the United States is still grappling with high inflation, and more than half of U.S. consumers report that inflation is impacting their food purchases. However, The Hershey Company's categories remain resilient. According to their consumer insights, chocolate and salty snacks are among the top three treats that consumers are unwilling to give up. Furthermore, in the event of a prolonged recession, The Hershey Company is likely to perform well, as it has historically outperformed the broader market during such economic downturns. During the recession in 2007-2009, The Hershey Company's stocks outperformed the broader market. The salty snack division will grow. Since Michele Buck became the CEO, The Hershey Company has acquired Amplify (popcorn), Pirate's Booty (cheese puffs), and Dot's Homestyle Pretzels (pretzels). Now, the salty snack division contributes 10% of sales, but The Hershey Company aims to grow the division to contribute 20% of sales within a decade. The Hershey Company aims to boost sales by expanding distribution and increasing production. Furthermore, they want to introduce new packaging sizes and new varieties. So far, they seem successful as their products are increasing sales and gaining market share. The Hershey Company has expressed interest in acquiring additional brands of salty snacks should the opportunity arise. Higher dividends. The Hershey Company recently increased its dividend by 15%, marking the second consecutive year of a 15% increase. Although the dividend yield may not be high currently, it has the potential to increase in the future. The Hershey Company has increased its dividend more than the sector median. The company has achieved a ten-year average annual dividend growth rate of 9,8% compared to the sector median of 5,3%. Management has mentioned that their payout ratio is still slightly behind where they would like it to be and where it has been historically. It seems that management is prepared to further increase dividends.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 9,06, which is from the year 2023. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 8% in the next five years. Additionally, I have selected a projected future P/E ratio of 16, which is double the growth rate. This decision is based on The Hershey Company's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $77,36. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy The Hershey Company at a price of $38,68 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 2.323, and capital expenditures were 771. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 540 in our calculations. The tax provision was 310. We have 204,393 outstanding shares. Hence, the calculation will be as follows: (2.323 – 540 + 310) / 204,393 x 10 = $102,04 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With The Hershey Company's Free Cash Flow Per Share at $7,59 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $87,19.
The Hershey Company is an interesting company. I believe that management has made the right decision by investing in salty snacks, as this could serve as a significant driver of growth for The Hershey Company in the future. The Hershey Company has outperformed the S&P 500 over the last few decades, while also increasing its dividend more than the sector's median. I also appreciate that The Hershey Company can thrive in various economic environments. However, The Hershey Company is also facing some risks. The high commodity prices may remain elevated for years but will eventually normalize. Competition is a long-term risk, and The Hershey Company will need to continue to be innovative to protect or gain market share. We are witnessing a trend towards a healthier lifestyle, which could potentially impact The Hershey Company in the future. This includes the possibility of sugar taxes. Nonetheless, I believe that the potential outweighs the risk, and I am interested in purchasing Hershey shares at a price below $160. This would offer me a discount on the intrinsic value based on both the Ten Cap price and the Payback Time price. It is also because I anticipate a higher purchase price when performing the calculations based on the 2024 numbers in a year from now. The Hershey Company foresees lower capital expenditures, while commodity prices may decrease despite their initial rise in early 2024.
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