HSY Market Research & Analysis Report
Updated Dec 4, 2015

Growth and Balance Sheet

The company reported net income of $155 million, or 70 cents diluted earnings per share for the third quarter of year 2015 ending October 4. That's down from net income of $224 million, or $1.00 diluted earnings per share for the same quarter last year. Net revenue for the third quarter was $1,961 million, virtually unchanged from $1,962 million for the same quarter last year. US sales were below expectations due to lower than expected candy, mint and gum (CMG) retail takeaway. However, net sales were still up 2.5%, in comparison to the same quarter last year, to $1,732 million, primarily due to net price realization. International and Other sales were down 15.2% to $227 million, primarily due to underperformance of the Chinese chocolate business. Company’s gross margin improved by 165 basis points to 45.50%, from 43.85% for the same quarter last year, primarily due to net price realization, supply chain productivity, and cost savings initiatives. The operating margin deteriorated from 18.28% for last year’s third quarter to 15.45% for the current quarter. Net cash provided by operating activities for the nine months ending October 4, 2015 was $588 million, up from $387 million for the nine months ending September 28, 2014. Cash and cash equivalents as of October 4, 2015 were $344 million, in comparison to $375 million as of December 31, 2014. HSY forecasted EPS for the fourth quarter of 2015 is expected to be from $1.03 to $1.07, compared to actual EPS of $1.76 for the fourth quarter of last year. The financial strength indicators of the company are at worse levels than the industry averages. Company’s current ratio is 0.99 and the industry average ratio is 1.69. The quick ratio of 0.62 is also worse than the industry average of 1.31. The interest coverage ratio of 15.85 is at healthier levels than industry average of 8.58. In terms of efficiency and effectiveness, the asset turnover ratio of 1.30 is at better levels than the industry average of 0.92; the inventory turnover ratio of 4.75 is trailing the industry average ratio of 6.49; and the ROE of 39.46% is at much better levels than the industry average of 28.9%. 

Valuation

HSY PE stands at 37.83 above the industry average of 20.28, and above the stock market average represented by the S&P 500 P/E of 23.18. The company is currently trading above the maximum P/E ratio of 15x, and over the last five years, the company’s shares have traded in the range of 21.30x to 27.59x trailing 12-month earnings. HSY's current Price/Sales of 2.45 is above the average of its industry of 0.38. HSY’s head to head comparison to its main competitors shows that the company has the highest gross margin, and one that is above the industry average. Moreover, the achieved operating margin by the company is also the best result among the competition, and it is above the industry average. The company has not shown any revenue growth in comparison to the same quarter last year, but nor has the industry in general, and the peers have experienced declines in revenue for the quarter. The company trades at higher P/E ratio with regards to the selected peers, and at an average P/S ratio. HSY’s twelve trailing months EBITDA of $1.70 billion is the middle range result from the selected peers, and above the industry average EBITDA of $51.81 million. The stock is currently trading below its intrinsic value of $91.24, this suggests that the stock is currently undervalued at these levels. The beta of 0.57 implies lower volatility of the stock with respect to the S&P 500. HSY has shown favorable earnings consistency over the last five years. Moreover, company’s earnings have increased by 14.62% over the same period. The current quarter earnings in comparison to the same quarter last year have decreased by 30%. HSY’s current price levels are above the maximum level, 24.1% below the 52 week high of $111.35, and the technical analysis give neutral view of the stock. The majority of analyst ratings are hold. HSY has twelve tailing month dividend payout ratio of 97% and trailing annual dividend yield of 2.60%.

About HSY

The Hershey Company (Hershey) is a provider of chocolate and sugar confectionery. The Company’s principal confectionery offerings include chocolate and sugar confectionery products; pantry items, such as baking ingredients, toppings and beverages; snack items, such as spreads, and gum and mint refreshment products. The Company operates through two segments: North America and International and Other. The North America segment is responsible for its chocolate and sugar confectionery business in the United States and Canada. The International and Other segment includes all other countries where the Company manufactures, imports, markets, sells or distributes chocolate, sugar confectionery and other products. This includes operations in Asia, Latin America, Europe, Africa and the Middle East, along with exports to these regions. This segment also includes its global retail operations, including Hershey’s Chocolate World stores.

Competitor Comparison

The Hershey Company (NYSE: HSY) N.V.

Highlights

The Hershey Company manufactures, imports, markets, distributes, and sells confectionery products. The stock closed yesterday’s trading session at $84.56. In the past year, the stock has hit a 52-week low of $82.41 and 52-week high of $111.35. The intrinsic value of the stock is above the current price. HSY has a market cap of $18.56 billion and is part of the Consumer Goods sector.

• Leadership position in the US confectionery market
• Robust portfolio of brands
• Strong focus on R&D

• Excessive dependence on the US market
• High long term debt

HSY Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. HSY's 52 week high is $111.35, current price is $84.56, is 24.1% below the 52 week high.

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. The company has a P/E ratio of 37.83, the average industry P/E ratio is 20.28, and is above the S&P 500 P/E ratio of 23.18.

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders. Insiders own 0.20% of HSY stock. Management's representation is not large enough. This does not satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

HSY is trading in the range of $83.04 - $88.47 in the past 30 days. The stock has been showing support around the level of $83 and resistance in the $97 range. The stock is trading below the 50-Day Moving Average and below the 200-Day Moving Average. The RSI(14) is 42.05. From January to August the stock was in a bearish trend, going from the resistance at around $110 to the support level of around $85. After finding support the stock spent the next two month recuperating some of the losses made during the bearish trend, but soon hit resistance at around $97- a resistance level from May earlier that year. Currently the stock is trading near the August support level and going below it, and staying there, would definitely mean that the bears are still having the upper hand. Our indicators give neutral view of HSY.

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com are 2 Buy, 1 Outperform, 12 Hold, and 2 Underperform.

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. HSY’s annual EPS for the last 5 years were 4.28, 5.30, 5.60, 6.98, and 7.29 this type of earnings action is very favorable.

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry. HSY’s Total Debt/Equity of 295.4 is above the required maximum, and it is above the industry average of 157.1.

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. HSY’s EPS growth for this quarter relative to the same quarter a year earlier is -30%, below our target.

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. HSY’s annual earnings growth rate over the past five years is 14.62%, above our target.

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.