Capital Budgeting
hazem28
hersheys_presentation.pptx
About Hershey
The company was founded by Milton S. Hershey in 1894 and is headquartered in Hershey, PA.
Hershey has approximately 13,000 employees worldwide.
It operates in the geographic regions North America and International (50 different countries).
With more than 80 brands, Hershey produces chocolate and sugar confectionery products .
90% of its revenue come from the United States.
| Chocolate industry sales of the U.S. from 2013 – 2017 (in Billion $) http://www.statista.com/statistics/262473/chocolate-sales-of-the-united-states/ | ||||
| 2013 | 2014 | 2015 | 2016 | 2017 |
| 20.1 | 20.6 | 21.2 | 21.7 | 22.7 |
Hershey’s Products
Its principal product groups include chocolate and confectionery products, gum and mint refreshment products, and pantry items such as baking ingredients, toppings and beverages. Its brands include Hershey's, Reese's, and Kisses.
Hershey’s Competitors
Hershey has the largest share of the US Chocolate market.
Its closest competitor is Mars (Mars, Snickers, M&M, Twix...).
Threat of competition from Nestlé & Cadbury Schweppes (now part of Kraft Foods) is mitigated trough licensing agreements.
5Y Stock Comparison Competitors (HSY – Mars – Mondelèz – S&P500 – Nestlé)
Historical Financial & Value Drivers
| Historical | |||||
| 2010 | 2011 | 2012 | 2013 | 2014 | |
| Revenue | 5,671,009 | 6,080,788 | 6,644,252 | 7,146,079 | 7,421,768 |
| COGS | 4,765,711 | 5,025,760 | 5,533,104 | 5,806,404 | 6,032,193 |
| EBIT | 905,298 | 1,055,028 | 1,111,148 | 1,339,675 | 1,389,575 |
| Taxes | 299,065 | 333,883 | 354,648 | 430,849 | 459,131 |
| EBT | 808,864 | 962,845 | 1,015,579 | 1,251,319 | 1,306,043 |
| Implied Taxes | 334,720 | 365,849 | 388,021 | 461,271 | 488,496 |
| NOPAT | 570,578 | 689,179 | 723,127 | 878,404 | 901,079 |
| Depreciation | 215,763 | 210,037 | 201,033 | 211,532 | |
| Fixed + WC Investment | (10,652) | (64,673) | 115,697 | (902,030) | |
| FCF | 894,290 | 868,491 | 1,195,134 | 210,581 |
| Value Drivers | Historical | ||||
| 2011 | 2012 | 2013 | 2014 | ||
| Sales Growth | 6.57% | 6.74% | 8.48% | 7.02% | 3.71% |
| Operating Profit Margin | 15.96% | 17.35% | 16.72% | 18.75% | 18.72% |
| Effective Tax Rate | 36.97% | 34.68% | 34.92% | 34.43% | 35.15% |
| Investment Rate | 1.5% | 8.9% | -13.2% | 100.1% | |
| Cost of Capital (WACC) | 6.02% | ||||
| ROIC | 25.26% | 27.46% | 26.89% | 27.66% |
Sales Growth = (sales– sales-1 )/ salesn
Operating profit margin = Sales / EBIT
Tax rate = Taxes / EBT
Investment rate = (FC+WC)/NOPAT
ROIC = NOPAT / ((InvCapBeg+InvCapEnd)/2)
WACC – Capital Asset Pricing Model
| Book Value | Market Value | |
| Debt | 2,325,771 | 2,325,771 |
| Equity | 1,519,530 | 22,480,000,000 |
| Total Debt and Equity | 3,845,301 | 22,482,325,771 |
| Capital structure of debt | 60.48% | 0.01% |
| Capital structure of equity | 39.52% | 99.99% |
| Total | 100.00% | 100.00% |
| DEBT | ||
| Credit rating (Moody AA) | 3.56% | 3.56% |
| Tax rate | 35.15% | 35.15% |
| After tax cost of debt Rd(1-T) | 2.31% | 2.31% |
| EQUITY | ||
| RF (30YR) | 2.49% | 2.49% |
| β current beta <1 = more stable (1 = price moves with market) | 0.64 | 64.00% |
| Expected return | 8.00% | 8.00% |
| MRP = expected return – risk free rate | 5.51% | 5.51% |
| Re(1-t) | 3.90% | 3.90% |
| CAPM = re = RF + β (MRP) | 6.0164% | 6.0164% |
| WACC | 3.2829% | 6.0159% |
http://finra-markets.morningstar.com/BondCenter/Results.jsp
https://www.moodys.com/research/Moodys-Disclosures-on-Credit-Ratings-of-The-Hershey-Company--PR_238214 http://www.bondsonline.com/Todays_Market/Composite_Bond_Yields_table.php
http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2015
http://finance.yahoo.com/echarts?s=HSY+Interactive#symbol=HSY;range=
Forecast & Residual Period
| Forecast | Residual | |||||
| 2015 | 2016 | 2017 | 2018 | 2019 | ||
| Revenue | 7,792,856 | 8,221,464 | 8,714,751 | 9,281,210 | 9,930,895 | 10,104,686 |
| COGS | 6,331,465 | 6,589,259 | 7,071,762 | 7,717,051 | 8,157,936 | 8,199,653 |
| EBIT | 1,461,392 | 1,632,204 | 1,642,989 | 1,564,159 | 1,772,959 | 1,905,033 |
| Taxes | 514,848 | 575,026 | 578,825 | 551,053 | 624,614 | 671,143 |
| NOPAT | 946,543 | 1,057,179 | 1,064,164 | 1,013,106 | 1,148,346 | 1,233,890 |
| Depreciation | 209,591 | 209,591 | 209,591 | 209,591 | 209,591 | 209,591 |
| Fixed + WC Investment | 47,327 | 74,003 | 31,925 | (81,048) | 45,934 | 74,459 |
| FCF | 1,203,462 | 1,340,772 | 1,305,680 | 1,141,649 | 1,403,871 | 1,517,940 |
| PV | 1,135,341 | 1,193,283 | 1,096,274 | 904,293 | 1,049,054 | 26,589,567 |
| Value Drivers | Forecast | Residual | ||||
| 2015 | 2016 | 2017 | 2018 | 2019 | ||
| Sales Growth | 5.00% | 5.50% | 6.00% | 6.50% | 7.00% | 7.00% |
| Operating Profit Margin | 18.75% | 19.9% | 18.9% | 16.9% | 17.9% | 18.9% |
| Effective Tax Rate | 35.2% | 35.2% | 35.2% | 35.2% | 35.2% | 35.2% |
| Investment Rate | 5.0% | 7.0% | 3.0% | -8.0% | 4.0% | |
| Cost of Capital (WACC) | 6.02% | 6.02% | 6.02% | 6.02% | 6.02% | 6.02% |
| ROIC | estimated | 29.00% | ||||
| Spread (ROIC – WACC) | 22.98% | |||||
| Residual Growth | estimated | 1.75% | ||||
| Residual Investment Rate | calculated | 6.034% |
Estimate of Corporate Value
| GROWTH RATE MODEL | |
| PV of Forecast 17% | 5,378,245 |
| PV of Residual or Terminal Value 83% | 26,589,567 |
| PV of All Future Cash Flows | 31,967,811 |
| Cash and Marketable Securies | 471,985 |
| Corporate Value | 32,439,796 |
| Value of Debt | 22,480,000,000 |
| Value of Equity Holders | 22,447,560,204 |
| Value per Equity Share | 105.64 |
Summary
In conclusion, Hershey Corporation will continue to be successful in the Chocolate and Confectioners Market.
The emergence of business in Asia and continued growth in North America and Europe will keep the company on its path of steady growth.
Chocolate is a staple that is consumed during all cycles of the economy and the brand name recognition and promise of Hershey will keep the company in good standing.
References
http://www.thehersheycompany.com/investors/stock-information/stock-quote-and-charts.aspx
http://www.thehersheycompany.com/investors/company-profile.aspx
http://www.marketwatch.com/investing/stock/hsy/financials/
http://finra-markets.morningstar.com/BondCenter/Results.jsp
https://www.moodys.com/research/Moodys-Disclosures-on-Credit-Ratings-of-The-Hershey-Company--PR_238214 http://www.bondsonline.com/Todays_Market/Composite_Bond_Yields_table.php
http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2015
http://finance.yahoo.com/echarts?s=HSY+Interactive#symbol=HSY;range=
http://www.statista.com/statistics/238794/market-share-of-the-leading-chocolate-companies-in-the-us /
http://www.statista.com/statistics/262473/chocolate-sales-of-the-united-states/
