Analyzing Stock Price of Hershey Company - Essay Example

Proposal of Analyzing Hershey's Stock Price Executive Summary A stock analysis of the company reveals that it is a viable place where one can invests in as the returns from the stock market for its name are huge. A P/E ratio valuation of the firm’s stocks reveals that Hershey Company has a higher chance of generating higher future incomes. The company’s Dividend discount model analysis also confirms this by it indicating that the company’s stock’s current price is undervalued. This means that an investment made now is likely to generate high returns when viewed in terms of the stock’s future value. Using the results of the following report, my recommendation will be to invest into the Hershey stocks, as the company’s performance in the industry is commendable as well as its stock’s performance. After thoroughly analyzing the stocks of Hershey Company, I would note that the company has a potential for a continued appreciation for the value of its stock price in the stock market. However, my analyst recommendation in overall would be a buy of the shares and not a strong purchse for the stocks of the company. The reason for this is due to the rapid increase in the company’s share price and a relatively high P/E ratio. My recommendations based on my review of the company’s financial indicators, its opportunities for future growth and its comparison to the main competitors in the field (Fridson, Martin and Fernando 75). A detailed analysis that led to the drawing of my conclusion is as discussed in the report below. Brief description of Hershey Company The Hershey Chocolate Company is a US-based firm that is incorporated according to the laws of the State of Delaware. However, the company was founded in 1894 by Milton S. Hershey. Since that time, the company has remained as the leading manufacturer of chocolates and other sugary confectionaries, and has a marketing base of about 42.5% in North America. The company has several wholly-owned subsidiaries and entities to which it has a major controlling interest. This company is also the major and largest producer of superiority chocolate in North America and leads globally in chocolate and sugar confectionery production. The company functions as a single reportable segment in the manufacture, marketing, sale and distribution of the products under various brand names. The company is founded on the basis and principles of returning back to the community in which it operates in through corporate social responsibility (Brigham, Eugene and Michael 120). The amount of revenue that the company generates equals nearly to $6billion annually and has a current employment base of about 14,000 employees across all its subsidiaries. Over the years, the company has portrayed consistency in its growth patterns both in terms of market share and the market holdings. It has accumulated a large amount of wealth which have seen it trade perfectly in the stock market. Through this, the company has been able to earn itself a positive image and reputation both nationally and internationally following the various innovation programmes it has invested into. One such innovation programme is that of the ‘Innovative Cocoa – Link Mobile Technology Programme’ that was so far expanded to Cote d’Ivoire in May 2013. However, the company’s growth is expected to continue as a result of the announcement that it will price $250million, 2.625% notes by the year 2023. Recent developments in Hershey In the recent past, Hershey Co. has had several developments that have been witnessed through acquisitions of other small firms thus, turning them into its subsidiaries. For instance, in the year 1996, Hershey purchased the operations of America in Leaf Candy Company. In 1999, the company diversified and divested its Pasta group into several equity partners in a bid to form the New World Pasta Co. currently known as Ebro Foods. In 2002, the public became aware of the intention of Hershey Trust Foundation that was seeking to sell its controlling interest in the Hershey Foods Corporation. At this time, the value of the company’s stocks prices increased or plummeted tremendously at 25% with about 19 million shares of the company trading on that particular single day. In December 2004, the Hershey Chocolate Company acquired another firm by the name, Mauna Loa Macadamia Nut Corp. from the Shansby Group. In July, 2005, the company again acquired another company by the name Scharffen Berger which was a Berkeley, California based chocolate maker boutique. In November the same year, the company again acquired Joseph Schmidt Confections, which was a chocolate based in San Francisco. One year later, the company again acquired Dagoba Organic Chocolate, which was a boutique chocolate company that was based in Ashland, Oregon. The most recent activity by the firm is that of its agreement for acquisition with Brookside Foods Ltd. which is a private confectionery company that is based in Abbotsford, British Colombia. From all these activities most of which are acquisitions, it is evident that the company has a foreseeable future and will likely continue into business for the near future. Thus, for any investor willing to invest in the shares of the company, I would recommend the Hershey Chocolate Company. Hershey’s most current financial indicators The key financial statistics for Hershey Company Current P/E Ratio (ttm) 24.3879 Estimated P/E(12/2013) 23.6841 Relative P/E vs. SPX 1.5609 Earnings Per Share (USD) (ttm) 3.5534 Estimated EPS (USD) (12/2013) 3.6590 Estimated PEG Ratio 2.7864 Market Cap (M USD) 19,376.79 Shares Outstanding (M) 163.10 30 Day Average Volume 1,280,022 Price/Book (mrq) 17.6092 Price/Sale (ttm) 2.8904 Dividend Indicated Gross Yield 1.94% Cash Dividend (USD) 0.4200 Last Dividend 05/22/2013 5 Year Dividend Growth 6.63% Next Earnings Announcement 07/26/2013 ttm = Trailing twelve months mrq = Most recent quarter In the market today, the stock price of Hershey Co. is trading at a fair value of $85.9210 which is a drop by 0.85% in the stock market. However, this is expected to change in due course as the stock market values usually change. Hershey Co. (HSY) Stock Analysis Dividend discount model (DDM) The DDM relies on the concept that the true value of a stock should be same as the present value of future dividends that an investor will receive from that stock over time (Weaver, Samuel & Weston 215). Given by the formula Present stock value = Dividend per share / (Discount Rate – Dividend growth rate) Basing on the announced quarter year dividend of $0.64 and the previous quarter dividends of the company it is estimated that the next annual dividend will be $1.68. Using the company’s dividend history from year 2007 to 2012 (refer to figure 1) the growth rate is 8.5 percent. The discount rate is same as the company’s Weighted Average Cost of Capital (WACC), which gives 10.5 percent. Using the Dividend Discount model, the stock’s present value is $84 while the current market value of the stock is at $87.89. Present stock value = 1.68 / (0.105– 0.85) = $84 This indicates that Hershey’s stock is undervalued, therefore presenting a good opportunity to invest in the stock for its future. P/E Ratio Hershey’s Price to Earnings ratio is 30.41. This value is reached at using the formula P/E ratio = Current Market Value per Share / Earnings per Share From the company’s current financial data and NASDAQ stock quotes, current market value per share for Hershey is given as $87.89 (Hershey) and earnings per share as $2.89. This ratio is above the food and beverage industry ratio and the S&P 500 P/E ratio of 17.7. The ratio indicates that investors are expecting a significant growth in future earnings (Paramasivan & Subramanian 100). Therefore, it is advisable to invest in the stock. Hershey’s earnings and price targets Current Target Price High Target Price Estimate 99.00 Low Target Price Estimate 70.00 Mean Target Price Estimate 86.70 Standard Deviation 10.19 Date of Most Recent Estimate 05/30/13 Target Price History   Current 1 Week Ago 2 Weeks Ago 3 Weeks Ago High Target Price Estimate 99.00 99.00 99.00 99.00 Low Target Price Estimate 70.00 70.00 70.00 70.00 Mean Target Price Estimate 86.70 86.70 86.70 86.70 Standard Deviation 10.19 10.19 10.19 10.19 Date of Most Recent Estimate 05/30/13 05/30/13 05/30/13 05/30/13 Consensus EPS Estimates Trend   Qtr (06/13) Qtr (09/13) FY (12/13) FY (12/14) Current Estimate 0.71 1.00 3.66 4.04 7 Days Ago 0.71 1.00 3.66 4.04 30 Days Ago 0.71 1.00 3.66 4.03 60 Days Ago 0.73 1.01 3.64 4.00 90 Days Ago 0.73 1.01 3.63 3.99 Earnings Surprise   03/13 N/A N/A EPS Estimate 1.04 N/A N/A EPS Actual 1.09 N/A N/A EPS Difference 0.05 N/A N/A % EPS Surprise 4.81% N/A N/A As is seen from these tables, it is evident that the company has an impressive performance financially which might lead one into choosing to invest in it. However, a better decision would be that which is made with a look at the SWORT analysis of the company (Mladjenovic 145). Competition The company faces three main competitors, which include Mars, Nestle, and Mondelez International. However, the competition is not very significant following its secured rights to manufacture competitor products such as Nestle’s Kit-Kat bars and Cadbury Schweppes. These agreements help the company avoid foreign competition. To further hedge out competition the company has put in place plans to expand internationally with target markets including China, Singapore, and India (EDGAR database: Form 10-k). SWOT analysis of Hershey Company Strengths: a. Hershey Company monitored the establishment of The Milton Hershey School for boys who are orphan for the reason that of giving significant social and environmental conscientiousness so that public representation increases. b. Hershey started firstly the chocolate manufacturing renaissance. c. Hershey has a strong name and brand image because of becoming the largest pasta manufacturer. d. Hershey produces diversified products like gum and chocolate. e. Hershey focuses on numerous industry segments such as entertainment, restaurants resorts, and commercials so that Hershey’s popularity effortlessly spreads on large market areas. f. Hershey is very cooperative with students and professors; g. Hershey’s facility was designed to include housing, parks and schools for employees so that Hershey motivates employees. h. Hershey forerunners have more controversial relationships with the board of directors. Weaknesses: a. Hershey has more long term debt than key competitors b. Company is hard put to do company control because of entering different geographic market. c. The company incurs a lot of costs and expenses in marketing its products particularly in advertisement. For instance, advertisement expenses increased by 46 % in the year 2012. Opportunities: The company has several opportunities to which it seeks to diversify and expand its growth activities as well as improving productivity. These include among others: a. Customers want to be supplied with richer products/changing tastes and as such this is an opportunity for the company. b. Hershey serves dark chocolate for health benefit. c. To eliminate child labor laws for African countries, Hershey involved International Cocoa Initiative Foundation. d. The company also seeks to involve efficiency improvements for distribution of its product and as such might call for the services of distributors. e. Hershey has a powerful communication strategy with both the customers and suppliers. f. The company products cocoa in new areas (i.e. India). g. Company has a lot of different market area because of increasing in global trade. h. Hershey has a strong customer loyalty and thus, enables it to have a grip of the market in which it sells its products in. As such, it is difficult for its competitors to beat its sales in the market. Threats: There are several threats that have faced the company in its bid to produce the chocolates it produces. Some of the challenges include: a. Nestle, Mars and Cadbury are primary power competitors. b. Hershey‘s product demand decrease because of increasing diabetes. c. Society looks forward to the awareness of greater ecological concerns with the company to the extent that Hershey established a treatment facility which had high cost. d. Ever-increasing foundational value for chocolate raw resources revolutionizes according to diverse geographic locations. e. Lack of government support to developing countries (poor education of new technologies) f. Increased cost of producing products based on the technological process since it is always improving due to technology g. Difficulties in achieving balanced enhancement of minimum wage of the human resources for prospect years. h. Steady price increase of milk and sugar. i. Decreasing agricultural areas because these areas are currently being used for establishing factories and buildings. This shall affect the supply of raw materials to the company thus, affect its production capacity. j. Natural disasters (i.e. hurricanes) are disrupting growth of chocolate ingredients. k. Increasing fluctuation of exchange rates. l. Nestle and Mars have different divisions such as beverages and drinks. Works Cited Brigham, Eugene F, and Michael C. Ehrhardt. Financial Management: Theory and Practice. Mason, OH: South-Western Cengage Learning, 2011. Print. Fridson, Martin S, and Fernando Alvarez. Financial Statement Analysis: A Practitioner's Guide. Hoboken, N.J: Wiley, 2011. Internet resource. Mladjenovic, Paul. Stock Investing for Dummies. Hoboken: John Wiley & Sons, 2005. Internet resource. Paramasivan, C, and T Subramanian. Financial Management. New Delhi: New Age International (P) Ltd., Publishers, 2009. Internet resource. Weaver, Samuel C, and J F. Weston. Strategic Financial Management: Applications of Corporate Finance. Mason, OH: Thomson/South-Western, 2008. Print. http://www.thehersheycompany.com/investors/financial-reports.aspx http://www.nasdaq.com/symbol/hsy Read More