Edmund Simms's avatar
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The Hershey Company (NYSE: HSY), valuation on May 9, 2022
Last week I polled the community to see which stock you wanted to get my value-oriented take on. Joey (@joeyhirendernath) nominated $HSY, which brought the most votes. You can see the post here.

I'm not too fond of short term predictions and am no good at them; however, I will add one below using Commonstock's prediction feature. I have predicted that the price of Hershey's shares will drop to the median price on my Monte Carlo simulation. Let's see what happens!


The Hershey Company (NYSE: HSY), valuation on May 9, 2022

  • Stock: The Hershey Company (NYSE: HSY) common equity
  • Market cap: $46.5bn
  • Rating: Hold
  • Price: $226.00
  • Target: $189.48
  • 1-month prediction: <$195
source: S&P Capital IQ

Setting the stage
The Hershey Company (NYSE: HSY, $46.5bn market cap), founded in 1894, is a global confectionery business in the United States. The company makes money by manufacturing and selling branded chocolates, confectionery, gum, pantry items, and other snacks. Despite being the largest chocolate producer in North America and getting 87% of its $9.3bn of revenue there, the firm distributes its products to 80 other countries.

America’s confectionery and snack markets have been stagnant for the last decade. Despite total industry sales increasing at 2.5% per year in line with the rise in the consumer price index (CPI), the volume consumed per person has fallen. Americans, on average, now devour just 87.5kg of confectionery and snacks per year compared to 91kg in 2014.

Changing consumer preferences and shrinkflation, making products smaller while continuing to market them at the same price, are to blame. Packaged Facts, a packaged food market research organisation, in a 2017 study, found that vegetable and pulse-based snacks and yoghurt were the most rapidly expanding segments of the snack market. American households are becoming more health aware and are swapping chocolates and sweets for yoghurts and granola bars. Further, by tracking product sizes over the last five years, the British Office of National Statistics (ONS) found that four-fifths of packaged food products had shrunk despite prices going up. Consumers are switching what they buy and getting less value.
source: Statista

Hershey’s has expanded its range of non-confectionery products by buying other firms to keep up with what consumers want. Over the last five years, the company has ingested popcorn, puffed rice, protein bar, and pretzel businesses to beef up its offering and stem the decay of its slice of the snack industry. It worked. More Americans ate Hershey’s products. The company’s share of the local confectionery and snack market, which had dropped from 3.23% in 2014 to 3.06% in 2020, rose to 3.29% last year. Consequently, the firm’s revenues jumped by 10% in 2021, a fete that had previously taken six years.
sources: company financials, Statista, Valuabl

More of Hershey’s turnover filters through to the bottom line than for almost any other food company. Of the 1,219 food companies I sampled, Hershey’s average gross profit margin over the last two decades put it in the top 10% of all firms, and its average operating profit (EBIT) margin put it in the top 2%. Famous brands, economies of scale, and a substantial cost-advantage help the firm deliver huge margins. These competitive advantages allow the company to raise prices, negotiate lower costs for raw materials, and decrease the all-in cost per unit. The outcome of these advantages is a business that delivers high and stable returns on invested capital (ROIC), the average of which has been 26.1% over the last two decades, while the worst was a still-impressive 16.9% in the depths of the GFC.
sources: company financials, S&P Capital IQ

Story & valuation
As food producers raise prices and consumers switch to healthier bites, the global confectionery and snack market will expand by 2.5% per year and reach $1.73trn in 2027. Hershey's will expand production capacity and buy more non-confectionery snack businesses to diversify its range, especially abroad. Inflationary pressures are mounting, and costs will rise. Hershey's economies of scale and brand recognition will help the company weather the storm as customers tolerate higher prices. International growth comes with increased country risk, but the firm's robust credit rating and little debt keep the chance of distress low.

  • Revenues: Economists forecast the global confectionery and snack market, propelled by price increases and larger health-snack volumes, to expand at 2.5% per year and be worth $1.73trn by 2027. By expanding manufacturing capacity, raising prices, and buying more non-confectionery snack businesses, particularly ones with a presence abroad, Hershey's will grow at 5.6% per year and take a larger share of the global market. I forecast its global share to go from 0.6% to 0.7% and sales to pass $12bn in 2026.
  • Margins: Inflationary pressures are mounting, and costs will rise. But the company has a cost advantage, brand recognition, and a high starting platform from which to defend margins and raise prices. I forecast these factors to offset each other and for margins to remain at 23.74%.
  • Taxes & investment: I expect the company's tax rate to trend from its current effective rate to the underlying marginal rate of its operating regions. I also expect the company to continue delivering high returns on incremental invested capital as it expands production and seeks out acquisitions.
  • Free cash flows: Hershey's will continue delivering positive free cash flows and will not need to raise capital to fund its expansion.
  • Cost of capital: Hershey's is a large food products company getting 87% of its revenue from America and the remaining 13% from the rest of the world. Moody's, a rating agency, has assigned the company an A1 credit rating, and based on historical default data, I have ascribed a 1% cumulative chance of distress within ten years. The company has a 10.8% debt-to-equity ratio. I estimate the firm's cost of equity to be 7.37%, its pre-tax cost of debt to be 4.17%, and its weighted average cost of capital (WACC) to be 6.95%.
  • Non-operating assets: Hershey's has $338m of cash and equivalents, and investments I estimate are worth $286m.
  • Debts & other claims: The company owes creditors and landlords $5.3bn, and 1.3bn employee options are outstanding worth $50m.

source: Valuabl

Each share has an intrinsic value of $189.48. At the current price, $226.00 the investment has a 16% downside.

Sensitivity analysis & rating
Monte-Carlo Simulation is used to model uncertainty by assuming that the inputs to the valuation model will come from probability distributions around the estimates.
source: Valuabl

Buy ••••••• 10th: $122.80
Add ••••••• 30th: $159.36
Hold •••••• 50th: $193.93
Reduce ••• 70th: $240.17
Sell ••••••• 90th: $316.03

The Hershey Company (NYSE: HSY) common equity price is $226.00 and is at the 65th percentile of the Monte Carlo sample of intrinsic values. For this reason, it has a rating of Hold.

I do not own the stock. If I did, I would not be buying any more, and I would look to trim the position if the price got above $240 per share. I will place a small limit order at $122 per share. I'm not too fond of short term predictions and am no good at them; however, I will add one below using Commonstock's prediction feature. I have predicted that the price of Hershey's shares will drop to the median price on my Monte Carlo simulation. Let's see what happens!
$HSY will be under $195/share on 6/8/2022
12 Votes
Scoreboard Investor's avatar
Thanks for putting this together. Great to see other people’s opinions and analysis of companies I own. Started my position in January

Edmund Simms's avatar
@scorebdinvestor I hope you make bank! Outstanding business.
Stanley's avatar
You know, I did not know that yogurt was also spelled yoghurt ...yet oddly I find it entertaining that it is. O.o

Great work though, really appreciated!