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The Hershey Company: Will it sweeten your portfolio?

Opdateret: 7. aug.

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&P500 over the last few decades, and this trend should continue even if we are facing a longer recession. 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.

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 like milkshakes and have recently expanded into the salty snacks market. The Hershey Company produces and sells over 100 brands in around 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 brand moat. The Hershey Company reports in three segments. North America Confectionery (82% of 2022 sales) includes chocolate and non-chocolate confectionery, as well as The Hershey Company's retail operations, including their Hershey's Chocolate World stores. North America Salty Snacks, which account for 10% of sales in 2022, include ready-to-eat popcorn, pretzels, and other snacks. International sales, which account for 8% of total sales in 2022, refer to the geographic regions outside of North America.

Their 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 investigate the numbers to determine if The Hershey Company meets our criteria for having a strong moat. In case you want an explanation about what the numbers are, you can have a look at "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 10% in every year over the past 10 years. The Hershey Company hasn't been able to reach the heights they achieved in 2013 and 2014, but I'm not worried about it because they consistently deliver a return on invested capital (ROIC) above 10%. In nine out of ten years, their ROIC is above 15%.

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, but it is encouraging that The Hershey Company has managed to grow its numbers year over year since 2019.

Finally, we will investigate 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. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use margins to enhance clarity and improve understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected 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. The Hershey Company took free cash flow to a new level in 2018 and has delivered a free cash flow of more than $1 billion a year since then. Levered free cash flow margin has consistently been above 15% since 2018, which is encouraging to observe. Free cash flow yield is the lowest it has been in years, which could indicate that The Hershey Company is trading at a premium. However, we will discuss this further 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 2,03 years of earnings in debt. It is well below the 3-year requirement, so debt is not something that worries me.

Based on my findings thus far, I believe that The Hershey Company is an interesting 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 and competes with other high-quality chocolate manufacturers as well as 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 is dependent on commodities such as cocoa and sugar. Currently, cocoa and sugar prices are historically high, and it doesn't seem like the prices will decrease anytime soon due to a global drought in cocoa. This drought is expected to continue because of the weather phenomenon El Nino, which brings hotter and drier than usual conditions to cocoa-producing countries. The weather is also expected to impact the sugar harvest, which means that prices could remain high for at least one more year. 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 be expanded to other products.

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. Right now, the United States is experiencing high inflation, and over half of U.S. consumers indicate that inflation is affecting their food purchases. However, The Hershey Company's categories remain resilient. Their consumer insights show that chocolate and salty snacks rank among the top three treats that consumers are not willing to give up. Furthermore, The Hershey Company also outperforms the broader market during a recession. During the recession in 2007-2009, The Hershey Company increased by an annualized rate of 14%, compared to the broader market's 9%. 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 wants to increase 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 mentioned that they are interested in acquiring more brands of salty snacks if the opportunity arises. Higher dividends. The Hershey Company recently increased its dividend by 15%. And while the dividend yield may not be high, it could 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 9,7% compared to the sector median of 5,0%. Management has mentioned that their payout ratio is still slightly behind where they would like it to be and where it has been historically. Thus, it seems that management is ready to further increase dividends.

Now it is time to calculate the price of The Hershey Company shares. I perform three different calculations that I learned at a Phil Town seminar. 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 7,96, which is from 2022. I have selected a projected future EPS growth rate of 8% (Finbox estimates a 8% growth), a projected future PE ratio of 16 (which is twice the growth rate, considering that The Hershey Company has historically had a higher PE ratio), and we already have a minimum acceptable rate of return of 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $67,97. 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 $33,99 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The Operating Cash Flow last year was 2.264 capital expenditures were 609. I tried to review their annual report to determine the portion of the capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated for maintenance purposes. This means that we will use 426 in our calculations. The tax provision was 272. We have 204,374 outstanding shares. Hence, the calculation will be as follows: (2.264 – 426+ 272) / 204,374 x 10 = $103,24 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 $8,84 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $88,99.

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 median for the sector. 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 stay 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. However, these risks seem to be far out in the future. Unfortunately, I don't think that The Hershey Company will ever reach the Ten Cap price of $103,24. However if it did, I would buy the shares.

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