FIN 667Lisa Lee and Yinfei Dong

12/17/2014

Summary of HersheyBusiness DescriptionFinancial AnalysisValuationConclusion

Agenda

The Hershey Company

52 Week Price Range: $87.88 – $108.69 Current Price: $98.53Target Price Range: $100 - $106Recommendation: Hold

Valuation Method: DCF & Multiple Valuation, Gordon Growth Method

Overview

• Found in 1894, headquarted in Pennsylvania

• Global leading chocolate manufacturer

• Produced under 80 brands in over 70 countries worldwide

• Hershey Trust Co., as trustee for the benefit of Milton School maintains voting control over the Hershey company

Introduction and Company Profile

Company ProfileClosing Price 98.53

Average Daily Volume

1,057,260,000

Market Cap 21.32B

Dividend Yield

2.14%

P/E 26.23

P/B 13.78EPS 3.68

EV/EBITDA 14.44

Recent Events/Issues• The world will run out of cocoa, and the price

of cocoa is raising• Entered the agreement to acquire majority

share of Golden Monkey (China) in 2013• Acquired Canadian Confectioner Brookside

Food in 2013

SWOTStrengths

• Strong Market Position and Leadership

• Diverse Products and Strong Portfolio of Brands

Weakness• Limited Distributors for

Revenue Generation

• Over Reliance on the U.S. Market

Opportunities• Focus on Emerging Markets: India

and China

• Increasing Demand of Healthier and Low-fat Chocolates

• Widely Used of E-commerce and Online Stores

Threats• Increasing cost of raw materials

• Consumer habitats

Growth DriversKey Drivers

• Invested in Hershey’s five core brands

• Hershey has found opportunities from International market, especially expanding in emerging market.

• Able to meet target sales growth : 7%-9%

Product Executive overview:

- Hershey shows a strong sales growth during the past three years

- Total revenue increased 7.6% in 2013

- Total revenue increased 9.3% in 2012

2011 2012 2013 0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

Total Revenue Gross Profit Net Income

$6080.8

$6644.3$7146.1

Financial Analysis

Financial Analysis

2011 2012 2013 1,900.00 2,000.00 2,100.00 2,200.00 2,300.00 2,400.00 2,500.00 2,600.00

NOA

NOA

2011 2012 2013 0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

Operating Income

Operating Income

2004-12 2005-12 2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-1210

20

30

ROIC

TrendsFood industry is highly affected by unit

price of product

Price of raw materials increase (cocoa

and dairy)

Ebola outbreak, a short-term effect

Expand in emerging markets

Financial Analysis

Assumptions

Sales Growth 7-9%; 8.5%

Growth Profit Margin Growth

300 Basis Point

SG&Ａ Increased by 200 Basis Point (As percentage of

salesInterest Expense Remain at current level

Restructuring Expense Slowly decreased

Frisk Factors & Sensitivity Analysis

HSY’s returns have a

statistically significant positive

correlation with the volatility in

financial markets, interest rates

and other big market players

HSY’s returns do not have

statistically significant

correlation with price of raw

materials

COCOA SUGAR VIX OIL GOLD SP500 NSRGY GM MEZ

-0.2

0

0.2

0.4

0.6

0.8

1

1.2Senstivity to Risk Factors

COCOA SUGAR VIX OIL GOLD SP500 NSRGY GM MEZ

-6

-4

-2

0

2

4

6

8

Statistical significance of Risk Factors

DCF Valuation2011 2012 2013 2014 2015 2016 2017 2018

Net Sales 6080.8 6644.2 7146.1 7753.5 8412.6 9127.6 9903.5 10745.3 8.50%Cost of Sales (GOGS) 3548.9 3784.4 3865.2 4186.9 4542.8 4928.9 5347.9 5802.5 54.00%Gross Profit 2531.9 2859.8 3280.9 3566.6 3869.8 4198.7 4555.6 4942.8

Gross Profit Percentage 41.64% 43.04% 45.91% 46.00% 46.00% 46.00% 46.00% 46.00%

Operating ExpensesSelling, General and Administrative 1477.7 1703.8 1922.5 2248.5 2439.6 2647.0 2872.0 3116.1 29.00%

SG&A % of Revenue 24.30% 25.64% 26.90% 29.00% 29.00% 29.00% 29.00% 29.00%Total Operating Expenses 1477.457 1703.8 1922.5 2248.5 2439.6 2647.0 2872.0 3116.4EBIT 1055 1111.1 1339.7 1318.1 1430.1 1551.7 1683.6 1826.4

EBIT Margin 17.35% 16.72% 18.75% 17.00% 17.00% 17.00% 17.00% 17.00%Interest Expense 92.2 95.6 88.4 92.6 95.6 98.7 102.0 105.5 5.00%Earnings Before Income Taxes 962.8 1015.5 1251.3 1225.5 1334.5 1453.0 1581.6 1720.9

Income Tax Expense 333.9 354.6 430.8 428.9 467.1 508.5 553.6 602.3 35%Net Income 628.9 660.9 820.5 796.6 867.4 944.4 1028.0 1118.6

Profit Margin 10.34% 9.95% 11.48% 10.27% 10.31% 10.35% 10.38% 10.41%Sales Growth 9.27% 7.55% 8.50% 8.50% 8.50% 8.50% 8.50%

Cost of Long Term Debt

Effective Income Tax Rate

Historical ProjectedAssumpions

Revenue Growth %COGS as a % of Revenue

SG&A as a % of Revenue

DCF Valuation

2011 2012 2013 2014 2015 2016 2017 2018Assets

Current AssetsCash and Equivalents 693.7 728.3 1118.5 1685.7 1848.0 1979.1 2066.9 2095.6Inventory 649 633.3 659.5 715.6 776.4 842.4 914.0 991.7 Inventory Turnover Ratio 10.8Accounts Receivable 536.3 583.6 530.4 637.3 691.4 750.2 814.0 883.2 Days Sales Outstanding 30Marketable Securities 268.1 144.7 55.4 14.1 38.5Other Current Assets 167.6 168.2 178.8 155.1 168.3 182.6 198.1 214.9 Other Current Assets as a % of Revenue 2.0%

Total Current Assets 2046.6 2113.4 2487.2 3461.7 3628.7 3809.6 4007.1 4223.9Net PP&E 1559.7 1674.1 1805.3 1919.5 2048.5 2193.0 2353.5 2531.1Goodwill & Intangible Assets & Other Assets 767.3 954.8 1064.8 775.4 841.3 912.8 990.3 1074.5 Goodwill & Intangible Assets % of Revenue 10.0%

Total Assets 4407.1 4754.7 5357.51 6156.6 6518.5 6915.4 7350.9 7829.5

Liabilities Days Payable Outstanding 140Accounts Payable 1034.1 1095.2 1241.1 1605.9 1742.4 1890.5 2051.2 2225.6 Other Liabilities as a % of Revenue 10.0%Short-Term Debt 42.1 118.2 166 199.2 239.0 286.8 344.2 413.1 % of Previous Short Term Debt 1.2Long-Term Debt 1846.1 1788.7 1796.01 1852.7 1912.2 1974.8 2040.4 2109.3 Net Other Captial % of Revenue 58.0%Other Liabilities & Minority Interest & Deferred LT Liability 627.5 715.9 549.5 775.4 841.3 912.8 990.3 1074.5

Total Liabilities 3549.8 3718 3752.61 4433.2 4735.0 5064.9 5426.2 5822.5

Stockholders' EquityCommon Stock 359.9 359.9 359.9 359.9 359.9 359.9 359.9 359.9Retained Earnings 4707.9 5027.6 5454.3 5860.5 6302.9 6784.6 7308.9 7879.4Net Other Capital -4210.5 -4350.8 -4209.3 -4497.0 -4879.3 -5294.0 -5744.0 -6232.3 .Total Stockholders' Equity 857.3 1036.7 1604.9 1723.4 1783.5 1850.5 1924.8 2007.0

Total Liabilities and Equity 4407.1 4754.7 5357.51 6156.6 6518.5 6915.4 7351.0 7829.5

Parity Check 0 0 0 0.0 0.0 0.0 0.0 0.0

Historical ProjectedAssumptions

DCF Valuation

Free Cash Flow2011 2012 2013 2014 2015 2016 2017 2018 Assumptions

Beginning Cash 884.6 693.7 728.3 1118.5 1685.7 1848.0 1979.1 2066.9

Net Income 629 660.9 820.5 796.6 867.4 944.4 1028.0 1118.6Cash Flow from Operating Activities

Depreciation & Amortization 215.8 210 201 234.7 249.5 266.3 285.1 306.0 Depreciation as % of Prior year net PPE 13.00%Adj to Net Income 55 24.3 -44.2 0.0 0.0 0.0 0.0 0.0(Increase)/Decrease in Current Assets -124.77 -23.9 -42.8 -139.2 -128.2 -139.1 -150.9 -163.7Increase/(Decrease) in Current Liabilities 7.86 21.7 13.4 590.7 202.4 219.6 238.3 258.5Changes in Other Assets and Liabilities -195 201.7 240.5 0.0 0.0 0.0 0.0 0.0Net Cash Provided by Operating Activities 587.89 1094.7 1188.4 1482.7 1191.2 1291.3 1400.5 1519.4

Cash Flow from Investing ActivitiesCapital Expenditures -324 -258.7 -323.6 -348.9 -378.6 -410.7 -445.7 -483.5 CAPX % of Revenue 4.50%Other Cash Flows From Investing -16 -214.6 -28 -38.8 -42.1 -45.6 -49.5 -53.7 Other cash flows as % of Revenue 0.50%Net Cash (Used by) Investing Activities -340 -473.3 -351.6 -387.7 -420.6 -456.4 -495.2 -537.3

Cash Flow from Financing ActivitiesDividend (Payments) -304.1 -341.2 -393.8 -390.3 -425.0 -462.8 -503.7 -548.1 Dividend as % of Net income 49%Sale/(Purchase) of Stock -200.1 -261.9 -155.4 -194.3 -242.8 -303.5 -379.4 -474.2 Stock (Purchase) as % from PY 25%Increase/(Decrease) in LT Debt 3.8 -17.7 54.2 56.7 59.5 62.5 65.6 68.9 Long-term Debt % increase from PY 5%Other cash flow from Financial Activities 61.6 33.9 48.4 50.8 53.4 56.0 58.8 61.8 Other CF % increase from PY 5%Net Cash (Used by) Financing Activities -438.8 -586.9 -446.6 -527.9 -608.3 -703.8 -817.5 -953.4

Change in Cash and Equivalents -190.91 34.5 390.2 567.2 162.3 131.1 87.8 28.7

Ending Cash 693.69 728.2 1118.5 1685.7 1848.0 1979.1 2066.9 2095.6

Historical Projected

DCF Valuation

2014 2015 2016 2017 2018Earnings Before Interest and Taxes 1318.1 1430.1 1551.7 1683.6 1826.4x (1-Tax Rate) 856.8 929.6 1008.6 1094.3 1187.2+ Depreciation and Amortization 234.7 249.5 266.3 285.1 306.0- Capital Expenditures 348.9 378.6 410.7 445.7 483.5- Change in Net Working Capital 576.5 -9.3 -15.0 -20.6 -26.4= Free Cash Flow 166.1 809.9 879.2 954.4 1036.0

ProjectedProjected Free Cash Flow

Calculate Cost of Equity Using CAPM Risk-Free Market Risk Company β3.6% 9.2% 0.65

Capital Assets Pricing ModelCost of Equity = Rf + β(Rm - Rf) 7.2%

Market Cap Debt PreferredAmounts 22,148.8 1,796.0 0.0Cost of Financing 7.2% 5.0% 0.0%

Equity Debt PreferredCost of 6.7% 0.2% 0.0%Total WACC 6.9%

WACC = (Ke)(E/(D+E+P)) + (Kd)(1-t)(D/(D+E+P)) Terminal Growth Multiple MethodFinal Year EBITDA= 2,132.4

Enterprise Value / EBITDA Multiple 14.4xFinal Year Valuation= 30,706.1

Perpetuity Method FCF5(1 + g)(WACC - g)

Perpetuity Growth Rate 3.0%Terminal Value 27,360.7

DCF ValuationDiscount Cash Flows Back to Year 0 Using WACC as the Discount Rate

Terminal2014 2015 2016 2017 2018 Value

Cash Flow 166.1 809.9 879.2 954.4 1,036.0 30,706.1Present Value of Cash Flow 155.4 708.7 719.7 730.8 742.1 21,995.6

Enterprise Value of Company based on DCF 25,052.3

Calculating price per shareEV/EBITDA MultipleMethod

Enterprise Value of Company based on DCF 25,052.3- Long-Term Debt 1,796.0= Value of Equity 23,256.3

Shares Outstanding (millions) 220.9$105.28

EV/EBITDA Multiple Method

DCF ValuationDiscount Cash Flows Back to Year 0 Using WACC as the Discount Rate

Terminal2014 2015 2016 2017 2018 Value

Cash Flow 166.1 809.9 879.2 954.4 1,036.0 27,360.7Present Value of Cash Flow 155.4 708.7 719.7 730.8 742.1 19,599.2

Enterprise Value of Company based on DCF 22,655.9

Calculating price per sharePerpetuity Method

Enterprise Value of Company based on DCF 22,655.9- Long-Term Debt 1,796.0= Value of Equity 20,859.9

Shares Outstanding (millions) 220.9$94.43

Perpetuity Method

Gordon Growth ValuationUsing current earnings per

share of $3.76, current payout ratio of 57% the current dividend per share is calculated to be $2.14. We used cost of equity of 7.2% and an expected growth rate of 5% as the discounted rate. Hershey’s stock is expected to be $102.29 per share, indicating the stock is on target compared to its current price of $98.53.

Current Dividends per share $2.14

Cost of Equity (CAPM) 7.20%

Expected Growth rate 5.00%

$102.29

Growth rate Value7.0000% $1,146.616.7500% $508.416.2500% $239.705.7500% $156.315.2500% $115.685.0000% $102.294.7500% $91.633.5000% $59.953.0000% $52.56

Gordon Growth Model Value =

Comparable Companies

Hershey Mondelez General Mills Nestle0

20406080

100

7.15

34.917.81

93.21Total Sales in 2013 ($Billion)

Sales in 2013

43%

31%

16%

6% 4%US Confectionary Market Share

Hershey Mars Others Nestle Mendelez

Hershey Mondelez Nestle Gerneral Mills0

0.1

0.2

0.3

0.4

0.5

0.6

Profitability Ratio

Operating Margin Net Profit Margin

Current Price

Net Sales Growth (2013)

Hershey $98.28 7.6%

Modelez $39.2 0.8%

Nestle $75.05 2.7%

General Mills $52.75 7%

Multiple ValuationTotal Sales in 2013 ($Billion)($Million) EV EBITDA Revenue EV to EBITDA EV to Revenue

Hershey 23295 1613 7146 14.44 3.26

Nestle 238800 16059 92373 14.87 2.59

General Mills 40346 3315 17774 12.17 2.26

Mondelez 81952 5321 35299 15.4 2.32

Average 96100 6758 38148 14.22 2.61

Mean 14.66 2.45

($Million) EV Equity Value per Share

EV to EBITDA 22936/23646 $102.86 - $106.04

EV to Revenue 17505/18851.06 $78.51 – $83.64

Football FieldTotal Sales in 2013 ($Billion)

Target Price Range : $100 - $106Current Price: $98.28

Hold

P/E

EV/REVENUE

EV/EBITDA

DCF

60 65 70 75 80 85 90 95 100 105 110

68.28

78.51

102.86

94.43

15.18

5.13

3.19

105.28

Thank you!

Q&A

Total Sales in 2013 ($Billion)