Evaluation of corporate performance
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Hershey Company History
Hershey chocolate company was founded in the United States by Milton Hershey in 1909. The Hershey Company is a leading manufacturer of quality non-chocolate and chocolate and other chocolate-related grocery products in North America. The company has in excess of 80 brands around the globe and its annual revenues are about $ 7.1 billion. Some of the famous brands of Hershey Company include Jolly Rancher, Reese’s, Hershey’s, Ice Breakers and Hershey’s kisses (Bozich, 2009).
Hershey Company has been focusing on improving its presence in main international markets as well as making sure that they have a competitive edge in North America. In addition, Hershey Company has great plans of expanding its portfolio into other brands other than confectionery, where they will find out new ways of bringing goodness to individuals everywhere. For over 120 years, the company has been committed in carrying out good business through operating sustainably, ethically and fairly thus making a positive influence on the society. In this regard they been contributing towards a better life for its consumers, communities, employees, and eventually making sure that those children who are in need have a bright future (Stansberry, 2012).
Strengths and weaknesses of Hershey
Hershey Company has grown from to a $ 4 billion having various quality chocolates. The company also has a strong brand name which gives the company a strong image. The company has many strengths since they have been in business for a long period of time. The company has got a very good reputation among the shareholders since it pays the dividends always in time to all their shareholders. This has also led to many consumers being loyal to them and to have trust on the company. The company is popular due to their strong customer relations. Another strength of Hershey is that their pricing reasonable thus making them to be affordable to everyone. The Hershey Company enables their customers to make lifestyle choices which are balanced at work, school and also in the community. The company has more than fifty brands in their portfolio and has acquired very many corporations in America (“The Hershey Company,” 2012).
Hershey has a huge share of the market in North America and the sales keeps increasing almost each year. Hershey brands are produced for the health conscious customers to make sure that Hershey chocolates are healthier alternatives. Hershey Company assures their consumers with health issues for instance diabetics that the chocolates they sell to them are safe and healthier alternatives. The key strategy has been reinventing the image of the chocolates from being the way they are deemed as a source of excessive calories and sugar thus making individuals to be obese and/or diabetic, to a more appealing image where the chocolates are regarded to be a significant aid for protecting the customers from the heart disease and also enhancing the metabolism rate through using the flavonoids in their products (Kash, 2012).
Hershey company has however some weaknesses where they are supposed to improve in some areas so as to be more effective and profitable. The company is supposed to try gaining more experience in international market. Also around the world, the company has got very few multinational distributors. The company also has focused their business operations more in United States, where they make more money in United States more than countries around the globe. The company has high borrowing level in order to finance their business operations (Bozich, 2009).
Financial analysis of Hershey Company
Hershey earns very high returns on the invested capital than most businesses because of its leading brands and huge market share. Dividing the after-tax operating profit of the company by its average invested capital reveals that Hershey earns a return on invested capital in excess of 15 percent on the average. This shows that for every dollar that the company invests in maintaining or expanding its business, Hershey earns in excess of $ 0.15 in the after-tax profits every year. Therefore, Hershey earns approximately 15 percent of the after-tax return on their stock portfolio every year thus making it a very profitable business (Freedland, 2010).
In addition, the company compounds the effect through lowering its share count continually. Although since the financial crisis Hershey Company has been unable to repurchase a huge number of the shares, the continuing trend reveals that the company is committed towards reducing its share account over time. The Hershey’s combination of shareholder-friendly management and high returns on the invested capital has enriched the shareholders of Hershey Company over the last 20 years (Bozich, 2009).
Hershey Company has a leading and growing share of the United States chocolate market; its brand’s portfolio is more popular among the Americans compared to other brands of the other companies. This enables the company to charge prices which are higher than those of its competitors, thus enabling it to earn very high returns on the invested capital. Hershey will continue earning super profits as long as the Americans focus more regarding the brand which they are buying compared to the price of sugar-and-cocoa combination (Bozich, 2009).
In 2010, the net revenues of the company were 5.67 billion dollar with a net income of 510 million dollars. There was an increase of about 7% from 2009. Financial analysis shows that Hershey has been doing well financially. Hershey Company has for many years remained stable and profitable. The revenues of the Hershey company have been increasing every year. Despite the high revenues the company was highly affected by recession in 2007; however the company was able to recover the recession at a pace which is fairly quick. The net income of the Hershey company in 2007 decreased from 559 million dollars to 214 million dollars (Freedland, 2010). The net income of the company since 2007 has risen and in 2010 was listed at 510 million dollars. The revenues of the Hershey Company from 2006 were as follows:
2006: $4.94 billion2007: $4.95 billion2008: $5.13 billion2009: $5.30 billion2010: $5.70 billion
The EPS and profit margin of Hershey Company from 2006 goes along in the same trend. Hershey’s profit margin went to 4.3% in 2007 from 11.3% in 2006. The profit margin has been increasing steadily and recently was backed up to 8.9 percent. Similarly, the earnings per share of Hershey in 2007 went to $0.93 from $2.34 in 2006. After a constant increase, recently the earnings per share was listed at $ 2.21. The sales of Hershey Company rose by 2.4 percent year- over – year in first quarter of 2014 (“The Hershey Company,” 2012).
Shares in Hershey Company have increased by over 25 percent in past one year, and now they are trading at 100.38 dollars. Earnings per share for the recent financial year were $ 3.61and in the current financial year Hershey expects the earnings per share (EPS) to be in a range of between $ 4.02 and $ 4.11. This means Hershey Company is currently trading at 27.8 times compared to the earnings of last year and between 24.4 times and 25.0 times anticipated earnings for 2014. However, even if the EPS for 2014 is expected to be $ 4.11, the anticipated EPS growth for 2014 is 13.85 percent. This growth rate in EPS is a bit lower compared to the recent years. The EPS growth from 2008 to 2013 were as follows; 46.24% in 2008, 39.71 in 2009, 16.32 in 2010, 23.98 in 2011, 5.84 in 2012 and 24.48% in 2013 (Bozich, 2009). Despite a growth rate which is lower than usual, Hershey Company is trading a price to earnings ratio which is higher than usual. Shareholders who invested in the company paid 23.5 times on average of the EPS of the previous year between 2008 and 2013. This level is a bit lower compared to the 27.8 times of the last year’s earnings that Hershey Company is valued at currently. Hershey is currently valued 3.1 times of the last year’s revenues. The financial analysts anticipate that the revenues of the company will be 7.63 billion dollars in the current financial year thus giving Hershey Company a ratio of price to sales of 2.9.This is relatively high ratio compared to that of the last six years (Stansberry, 2012). The Hershey Company pays $ 0.485 as the quarterly dividend. The increase experienced in the price per share made the dividend yield to go down to 1.92 percent. Nevertheless, Hershey’s dividend has been increasing at an increased rate in the recent the recent years. Due to the anticipated growth of EPS of 13.85 percent, the dividend is expected to rise to 0.55 dollars per quarter. This would lead to an increase the dividend yield to about 2.19 percent while the payout ratio will be between a range of between 50% and 55% (“The Hershey Company,” 2012). Hershey Company has a balance sheet which is excellent with quick ratio of 1.30 and current ratio of 1.77. In addition, Hershey Company has 1.12 billion dollars or 5 dollars per share in regards to cash and cash equivalents. Hershey Company is a great company ideal for investment for those investors who focuses on long-term income growth. Although, the company has high growth in the recent years, at the current valuations the Hershey’s stock seems to be overvalued (“Why Hershey Is Overvalued,” 2012).
ROE (Return on equity) assesses the rate of return realized on the money invested by the shareholders and retained earnings of a given company emanating from the previous profitable years. This shows the ability of the company in generating profits from the equity of the shareholders (“Financial management,” 2011).ROE (DuPont formula) = (Net profit / Revenue) X (Revenue / Total assets) X (Total assets / Equity) = Net profit margin X Asset Turnover X Financial leverage X Net Income = $497.170731707million Net profit margin= (Net Income / Revenue) = (497.170731707 / 4666.22320769) = 10.65 %Asset turn over = (Revenue / Total Assets) = (4666.22320769 / 3881.64976454) = 1.2021Financial leverage = (Total assets / Equity) = (3881.64976454 / 1152.32256262) = 3.3685The Hershey Company’s annualized ROE for the quarter ended in Jun. 2014:
=10.65 X 1.2021 X 3.3685
ROE (Dupoint system) = 43.15 %
ROE (Return on equity) shows how efficiently a company is using investment funds in generation of earnings growth. ROEs that are between 15 percent and 20 percent are deemed desirable.Economic Value Added measures the financial performance of the company on basis of the residual wealth. EVA is calculated through deducting the cost of the capital from the company’s operating profit (“Financial management,” 2011).
Economic Value Added = Net Operating Profit After Taxes (NOPAT) – (Capital x Cost of Capital).
Hershey Company focuses on continuous improvement and thus the Company has adopted Economic Value Added concepts in order to help in measuring their performance. The Economic Value Added (EVA) of Hershey Company for a period of 5 years between 1997 and 2002 was 0.87. In 1997, the employees of Hershey realized that these processes and concepts were being adopted so as to get the required information which is needed in utilizing EVA. In 1988, EVA was being implemented fully, and it was part of hershey’s compensation program for the management, as well as free cash flow and earning per share measurements. Hershey also started recognizing the significant contribution by all the employees of Hershey towards the company’s market growth. Hershey’s Board of directors made an approval which oversees their employees increasing their stake in Hershey Company or providing those employees with a chance of becoming owners of the company for the first time. The opportunity was a great incentive to the employees in achieving goals of the company and in maintaining and enhancing the leadership position, increasing the company’s profitability and adding value in everything that the company does (Freedland, 2010).
Hershey’s stock during the past quarter has outperformed the market benchmark thus increasing the investors’ interest in the company. The Hershey company has been using a dividend payout ratio of 63%.The company pays 3 percent solid dividend they have been able to increase the dividend regularly over the past 5 years. Recently, the earnings are reasonably strong, and Hershey has a solid balance sheet and growing free cash flow. Hershey Company has an excellent combination of manageable financial leverage and free cash flow generation which is strong. The cash flow margin in coming years is expected to be 11.6% on average. The return on invested capital of Hershey is expected to expand from 37.9 percent to 41.7% in the next two years (Freedland, 2010).
Although, Hershey stock seems to be overvalued it is still worth buying which I can recommend to the investors. This is because the Hershey company is incredibly capital efficient. Also, the dividend payout ratio has been increasing every year since 1974. The company in actual fact pays out an extremely huge amount out of the profits produced by the company. For instance, in 2008, Hershey realized profits of about 500 million dollars from its operations but it spent approximately 300 million dollars on share buybacks and dividends (Stansberry, 2012). Hershey has the ability of returning so much capital to the shareholders since it necessitates little capital to grow. The company’s cash profits have increased nearly to 1 billion dollars while the company’s growth is approximately 200%. The company has got a very brand name among the investors since it pays the dividends always in time to all their shareholders. Due to all these outstanding factors, I would recommend the purchase of Hershey stock as a good investment decision since it is a no-risk investment.
Bozich, S. L. (2009). Hershey. New York, NY: Channel Lake.
Financial management (3rd ed.). (2011). London: BPP Learning Media.
Freedland, R. (n.d.). Is Hershey a Sweet Investment?. – The Hershey Company (NYSE:HSY). Retrieved April 1, 2010, from http://seekingalpha.com/article/196560-is-hershey-a-sweet-investment
Kash, R. (n.d.). The Hershey Company: Aligning inside to win on the outside – Ivey Business Journal. Ivey Business Journal. Retrieved April 5, 2012, from http://iveybusinessjournal.com/topics/strategy/the-hershey-company-aligning-inside-to-win-on-the-outside-2#.VC0wNVcpfIU
Stansberry, P (n.d.). One of the Greatest Investments of My Career. Why Hershey (HSY) is a Great No-Risk Opportunity. Retrieved February 16, 2012, from http://www.dailywealth.com/1990/hershey-great-no-risk-opportunity
Why Hershey Is Overvalued. (n.d.). – The Hershey Company (NYSE:HSY). Retrieved July 24, 2012, from http://seekingalpha.com/article/741961-why-hershey-is-overvalued