The Hershey Company is considered to be one of the leading chocolate and non-chocolate confectionery companies based in the US. The company’s head office is located at Hershey, PA. It has a corporate history of more than 100 years and it owns more than 80 brands. The company’s sales were $7 billions in 2013, and the company expects further growth in its revenue 2014. The company’s has global operations, and its employs more than 14,000 individuals within its global network (Company, 2012; Annual, 2014). The company’s current strategy is focused on expanding its operations in the international markets including China and Mexico. The company’s has a strong presence in local communities and invests a significant amount of funds for fulfilling its Corporate Social Responsibility plans (Corporate, 2014). The company has set out highest standards for ensuring ethical operations and compliance by its management and employees to ensure that issues related to corporate governance can be avoided (Corporate, 2014).
The Hershey Company’s business operations mainly involve manufacturing of chocolate and non-chocolate confectionery and its distribution throughout its global network (Company, 2012). Therefore, the company is an appropriate choice for the current report as it meets the pre-requisite of being a manufacturing company.
Analysis of The Hershey Company
The current report provides a comprehensive performance review of The Hershey Company. The review includes the analysis of financial and non-financial information provided by the company. The analysis makes use of financial data covering a three-years period from 2011 to 2013. The analytical methods used in this report include financial ratio analysis for three years, qualitative analysis of non-financial information, equity analysis, and communication trends analysis. The report also provides recommendations for investors on the basis of conclusions drawn from the analysis.
Financial Ratio Analysis
The financial ratio analysis involved the calculation and interpretation of key financial ratios of The Hershey Company under different categories of ratios including liquidity, operational efficiency, financial leverage, and profitability (Nobles, Mattison, & Matsumura, 2013). The following table provides findings of the financial ratio analysis.
|1||Current Ratio||Current Assets / Current Liabilities||1.77||1.44||1.74|
|2||Acid Test Ratio||(Current Assets – Inventory) / Current Liabilities||1.30||1.01||1.19|
|3||Receivables Turnover||Sales / Trade Receivables||13.47||11.38||11.34|
|4||Inventory Turnover||Cost of Sales / Inventory||5.86||5.98||5.47|
|5||Payables Turnover||Cost of Sales / Trade Payables||3.11||3.46||3.43|
|6||Receivables Days||365 / Receivables Turnover||27.09||32.06||32.20|
|7||Inventory Days||365 / Inventory Turnover||62.28||61.08||66.74|
|8||Payables Days||365 / Payables Turnover||5.86||5.98||5.47|
|9||Asset Turnover||Sales / Total Assets||1.33||1.40||1.38|
|10||Long-term Debt to Total Assets||Long-term Debt / Total Assets||0.34||0.32||0.40|
|11||Long-term Debt to Stockholders’ Equity||Long-term Debt / Stockholders’ Equity||1.12||1.48||2.04|
|12||Coverage Ratio||Earnings Before Interest and Taxes / Interest Expense||15.16||11.63||11.44|
|13||Operating Cash Flows to Interest Expense||Operating Cash Flows/o Interest Expense||13.45||11.46||6.38|
|14||Gross Margin||Gross Profit / Sales||45.9%||43.0%||41.6%|
|15||Net Profit Margin||Net Profit / Sales||11.5%||9.9%||10.3%|
|16||Return on Assets||Net Profit / Total Assets||15.3%||13.9%||14.3%|
|17||Return on Equity||Net Profit / Total Equity||51.1%||63.8%||73.4%|
Table 1: Results of Financial Ratio Analysis. Sources for financial data: Financial (2014); Annual (2014). Source for stock price data: Historical (2013).
The company’s liquidity is affected by various factors including fluctuations in sales, profit margins, price changes, and introduction of new products (Annual, 2014). The above table indicates values of two liquidity ratios including current ratio and quick ratio. These ratios reflected the short-term liquidity position of the company. The current ratio value was 1.77 in 2013 (2012: 1.44; 2011: 1.74). This implies that the company’s current assets exceeded the value of its current liabilities (Annual, 2014). A significant portion of the company’s current assets was held as cash and cash equivalents. This is a positive sign for the company as it has sufficient cash for its operations and any new product launch. The company is less likely to face financial difficulties in the short-term. However, the company was holding a large inventory of finished good included in its current assets in 2013 (Annual, 2014). The company commits its cash to inventory in anticipation of rising demand for its iconic brands. The company’s working capital was $29.39mn in 2013 that had substantially increased from $2.133mn in 2012 (Annual, 2014). The quick ratio, which is a better indicator of liquidity as it excludes slow-moving inventory, had a value of 1.30 in 2013 (2012: 1.01; 2011: 1.19). The ratio value was greater than 1 that reaffirms the company’s strong liquidity position in the last three years. Moreover, a declining trend in the values of current ratio and quick ratio was observed in the last three years. Overall, the company’s liquidity position remained strong.
A company’s ability to add value to shareholders’ wealth depends upon its assets utilization. For the current analysis, several useful ratios have been used for evaluating the company’s performance in terms of its assets utilization. It is important for a company to rapidly convert its sales into cash. Realization of cash depends on the terms agreed between companies and their buyers. Typically, companies offer credit period to their buyers in order to facilitate sales. However, they often face liquidity issues as their cash is held up as receivables for a long period (Nobles, Mattison, & Matsumura, 2013). The Hershey Company had receivables turnover of 13.47 in 2013 (2012: 11.38; 2011: 11.34). The improvement in receivables turnover over the last three years indicate that the company was taking lesser time to realize cash for its sales in 2013. This is ascertained by a reduction in receivables days from almost 32 days in 2011 to 27 days in 2013. Moreover, the company also recorded a non-current receivable in relation to tax adjustments pending with authorities of different countries. This amount was $63.9 million in 2013 (Annual, 2014).
The inventory turnover of the company remained low in all three years. In 2013, it was just 5.86 (2012: 5.98; 2011: 5.47) with inventory days of almost 62 days. Furthermore, the company signed up several commodity-hedging contracts to cover its purchases of inventory. In addition to these, the company remained quite efficient in paying its suppliers for its purchases as the company’s business depends upon smooth relationships with its suppliers.
The payables turnover was 3.11 in 2013 as compared to 3.46 in 2012. This resulted in payable days of just 5.86 days in 2013. Finally, the company’s asset turnover remained efficient. The company generated $1.33 of sales from $1 invested in its assets. The value of asset turnover greater than 1 reflected an efficient use of the company’s assets and shareholders can expect further addition to business value resulting from the company’s operations in the coming years. It must be noted here that total assets of the company include certain intangible assets. These assets including goodwill were recorded at their book value of $771.805 million in 2013 (Annual, 2014).
By using financial leverage ratios, the company’s long-term liquidity is evaluated. Long-term debt to assets ratio indicates that for every $1 invested in assets the company had $0.34 of long-term debt in 2013. The carrying value of the company’s long-term debt was $1,795.1 million in 2013 as compared to $1,530.9 million in 2012 (Annual, 2014). On the other hand, the company’s total assets had increased substantially by $602.6 million in 2013 (Annual, 2014). The company’s overall solvency position remained moderate. The long-term debt to equity ratio had a value more than 1 in the last three years. Despite a reduction in the ratio value since 2011, it could be argued that the company’s significant proportion of earnings went into repayment of loan and interest payments. The company had incurred major interest payments to meet its long-term debt and lease obligations i.e. $84 million in 2013 (2012: $81 million; 2011: $85 million). The company also received interest income generated from debt instruments offered by the company in the secondary market. Moreover, the company had a strong financial position in terms of its ability to generate sufficient EBITDA and operating cash flows (Annual, 2014). The company had a coverage ratio of 13.45 in 2013 (2012: 11.63; 2011: 11.44) and operating cash flows to interest expense ratio value of 13.45 in 2013 (2012: 11.46; 2011: 6.38). These ratios indicated an improvement in the company’s solvency position in the last three years. Therefore, it could be inferred that the company is expected to face no problem in meeting its future debt obligations.
The company’s profitability is evaluated using four different ratios including gross profit margin, net profit margin, return on assets, and return on equity. In the last three years, the company increased its gross margin over cost of sales. From 41.6% in 2011, it climbed up to 45.9% in 2013. This is reflective of the company’s strategy of increasing prices of its products to deal with the increase in its input costs. The company’s business primarily depends on cocoa and cocoa related products. In the recent years, the commodity prices have gone up. This situation has a direct affect on the profitability of the company (Annual, 2014). The company’s net profit margin has improved in the last three years. The results show that the net profit margin was 10.3% in 2011, and in 2013, it was 11.5%. This improvement in the net profit margin was mainly due to an increase in the company’s sales and also a reduction in the net interest expense. A significant expense element in the company’s income statement is related to selling, general, and administrative expenses (SGA). In the last three years, the company’s SGA expenses increased significantly (Annual, 2014). The company incurred higher costs and expenses to launch its new products and also improve its presence in the international markets. In the last years, the company carried out aggressive marketing campaigns that were aimed at positioning its brands in new and emerging markets (Annual, 2014). Shareholders are interested in estimating returns on their equity investments. For this purpose, return on equity is calculated for The Hershey Company. The results show a declining trend in the company’s return on equity. This could raise concerns of shareholders who expect companies to work efficiently on increasing their wealth.
Despite an increase in the company’s net income, ROE has declined due to significant increase in the company’s retained earnings. Moreover, the company is generating healthy return on assets of 15.3% in 2013 as compared to 13.9% in 2011. This suggests that the company generated higher earnings from the use of its assets in 2013. The return on assets has been calculated by using total assets value of the company (Annual, 2014). However, a better indicator would be that excludes intangible assets such as goodwill and intangible assets. In order to supplement the analysis presented in this report regarding the company’s profitability, DuPont Analysis has also been performed. The DuPont ratio provided below is used for determining ROE of common shareholders.
ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity) (Dyson, 2007)
|The Hershey Company|
|Total Assets Turnover||1.33||1.40||1.38|
Table 2: DuPont Analysis.
The company carries out its principal manufacturing in the US that is also its biggest market for sales. The international operations generated 16.6% of the company’s sales in 2013 (2012: 16.4%; 2011: 15.7%). In the last two years, the company acquired two major businesses in China and Canada to supplement its growing operations outside the US (Annual, 2014). The company’s major shareholding is with institutional investors including asset management companies and market funds (Investor, 2014). In the recent years, the company experienced a rise in input prices that increased it production costs. In order to cover these additional costs, the company increased its product prices. However, it was reported by the company’s management that the incremental product prices might not be sufficient to deal with the expected increase in costs in the coming years (Annual, 2014).
The company’s shares got listed on New York Stock Exchange in 1927. In the last five years, there was an increasing trend in the company’s stock price. This is illustrated in the following graph.
The company paid dividends to its shareholders on a quarterly basis in the last three years. The dividend payout ratio remained more than 50% in the last three years. This could be considered as highly positive aspect of investing into the company’s stocks. The shareholders can make capital gains from their shareholdings and also receive regular cash dividends from the company. The company’s shareholders can expect the same dividend payout in the coming year as there is no slowdown in the company’s business (Dyson, 2007). The following table provides information pertaining to dividends paid by the company and its dividend payout ratio.
|Dividend Per Share||1.81||1.56||1.38|
Table 2: Dividend per Share and Dividend Payout. Source: Stock (2014).
Furthermore, the following table indicates values of the company’s price to earnings ratio in the last three years. These values indicate that the company’s stocks traded at high multiples of earnings in the last three years. This supported the observed increase in the company’s stock price in the same period (Historical, 2013). In the same manner, the company’s shareholders can also expect more capital gains even in the next financial year by holding their investments in the company’s shares.
|Adjusted Closing Price (On the last day of trade)||$97.23||$72.22||$ 61.78|
|Earnings per Diluted Share||$3.61||$2.89||$2.74|
|Price / EPS||26.93||24.99||22.55|
Table 3: Stock Price and P/E Ratio. Source: (Historical, 2013; Annual, 2014).
The Hershey Company maintains a close relationship with its shareholders and other stakeholders. The company’s website provides comprehensive details related to the company’s equity in its Investors Relation section. The information provided by the company includes annual and quarterly reports, earnings estimates, historical stock prices and quotes, media and news reports, analyst information, and details of corporate events (Investor, 2014). The timing of disclosures does not indicate any delays from the company. This is beneficial for shareholders who seek up-to-date information regarding the company’s strategic decisions and their impact on its financial performance (Investor, 2014). This can help them in formulating their views regarding the company’s future and possible gains on their investments. The company has a hierarchical structure with vertical reporting lines. It maintains highly integrated CRM and ERP systems to communicate with its customers and suppliers (Annual, 2014).
Based on the above analysis, the following recommendations can be made for shareholders, who may be interested in making investments in The Hershey Company’s stocks.
- Keeping in view, the financial performance of the company it is recommended that shareholders should invest in the company’s stocks.
- The shareholders can receive cash dividends on a quarterly basis.
- The shareholders can achieve capital gains from their investments.
- The company’s stocks are likely to perform good both in short and medium terms.
- The company has a strong position in the chocolate and non-chocolate confectionery industry.
- The company is expected to perform above par in the next year.
- The company’s presence and its brands’ positioning in the international markets are improving.
- The company made acquisitions in the recent years that are likely to generate a positive impact on the company’s revenues, profitability, market positioning, and long-term success in the international markets.
- The company had performed well financially in the last three years.
- The company faces risks of high commodity prices including cocoa that could hamper its business performance in the coming years.
- The company had a strong liquidity position in the period from 2011 to 2013.
- The company had efficient asset utilization in the period from 2011 to 2013.
- The company had a moderate solvency position in the period from 2011 to 2013.
- The company has a strong profitability position in the period from 2011 to 2013.
- The shareholders can expect an increase in the company’s share price. This will result in capital gains for shareholders.
- The shareholder can expect future cash dividends from the company. The company paid dividends to its shareholders in every quarter of the last three years.
- Overall, The Hershey Company remains a strong performer both financially and strategically.
Annual Report. (2014). Web.
Company Profile. (2012). Web.
Corporate Governance. (2014). Web.
Dyson, J. (2007). Accounting for Non-Accounting Students. London: Prentice Hall / Financial Times.
Financial Statements. (2014). Web.
Historical Prices. (2013). Web.
Investors. (2014). Web.
Nobles, T.L., Mattison, B.L., & Matsumura, E.M. (2013). Horngren’s Accounting (10th ed.). New York: Pearson Education.
Stock Quote & Charts. (2014). Web.