The Hershey Company (NYSE:HSY) - Undervalued nowThe Hershey Company is an American multinational confectionery company, founded by Milton S. Hershey in 1894. The company initially focused on caramel and chocolate, eventually expanding into a wide range of confectionery products.
The company’s headquarters are located in Hershey, Pennsylvania, which is also home to Hersheypark and Hershey’s Chocolate World. ,
Business Model, Products, and Services
The Hershey Company is a leading confectionery manufacturer and marketer. Their core business revolves around producing and selling chocolate, sweets, mints, and other snacks.
Their key product lines include Hershey’s chocolate bars, Reese’s peanut butter cups, Kit Kat, Jolly Rancher, and Ice Breakers.
The company’s business model is centered on brand recognition, product quality, and extensive distribution networks.
Durable Competitive Advantage
Hershey possesses a strong durable competitive advantage primarily due to its iconic brand portfolio. Brands like Hershey’s and Reese’s have decades of consumer loyalty and strong brand recognition.
This aligns with the “unique product” business model, as these brands hold a distinctive place in the confectionery market.
Economic Moat
Hershey’s “economic moat” is built upon its powerful brand identity. The company’s brands have a long-standing history and strong emotional connection with consumers, creating a barrier to entry for competitors. Their distribution network also provides an economic moat.
Industry Outlook, Challenges, and Competitors
The confectionery industry is generally stable, but it faces challenges related to changing consumer preferences (e.g., healthier snacks), rising ingredient costs, and intense competition.
The company’s key competitors include Mondelez International (MDLZ), Kraft Heinz (KHC), Kellogg (K), and Campbell Soup Company (CPB). Additionally, increased competition from smaller, more innovative brands is also contributing to Hershey’s market share decline.
Health trends are a large challenge, sweet snacks have been under pressure as more consumers become aware of their calorie and sugar intake.
Supply chain risks are also a consistent threat for The Hershey Company, as disruptions in the procurement of key raw materials like cocoa, sugar, and dairy could impact production costs and margins. Additionally, geopolitical instability, trade restrictions, and transportation bottlenecks may further challenge the company’s ability to maintain steady inventory levels and meet consumer demand.
Comparative Analysis
The following is a comparative analysis of the company’s financial position and performance. The analysis evaluates eight key financial ratios to determine whether the company possesses a durable competitive advantage. The company’s financial ratios are compared with the median ratios of its main competitors.
Gross Margin %
Hershey maintains a consistent gross profit margin of 42%, which is significantly higher than the competitor average of 33.62%.
A high gross profit margin stems from the company’s durable competitive advantage, allowing it to price its products significantly higher than its competitors while maintaining strong profitability.
R&D to Revenue Ratio %
Hershey’s R&D expenditure is relatively low at 0.5% compared to its competitors’ 0.9%. This suggests that its competitive advantage relies more on brand strength and distribution than on product innovation.
Depreciation to Gross Profit Ratio %
Hershey’s depreciation-to-gross-profit ratio is a reasonable 9.48%, slightly lower than its competitors’ 9.65%, suggesting efficient asset utilization.
Interest Expense to Operating Income Ratio %
Hershey’s Interest Expense to Operating Income Ratio is 7.4%, significantly lower than its competitors’ 16.3%, indicating a strong financial position.
Operating Margin %
Hershey’s operating margin is strong, consistently above 20%. This suggests efficient operations and pricing power.
Free Cash Flow Margin %
Hershey’s free cash flow margin fluctuates, but it consistently remains higher than that of its competitors. This is a strong indicator that Hershey has a durable competitive advantage.
Basic Earnings Per Share (EPS)
Hershey’s EPS shows a generally upward trend, indicating consistent profitability.
Return on Equity (ROE)
Hershey’s ROE is strong and significantly higher than that of its competitors, indicating efficient utilization of shareholder equity.
Based on the analysis of key financial ratios, we have determined the following: The Hershey Company’s financial condition is stronger than that of its competitors. We believe the company holds a competitive advantage within its industry.
Intrinsic Value Valuation
Intrinsic Value: $236.80
Current Price: $171.16
Margin of Safety: 27.72%
Based on the provided data, Hershey’s stock appears to be undervalued, with a significant margin of safety.
The company’s strong brand portfolio, consistent profitability, and efficient operations are positive indicators.
The 27.72% margin of safety provides a good buffer against potential market fluctuations or valuation errors.
Recommendation: Given the current undervaluation and the company’s strong fundamentals, a “buy” recommendation is warranted. However, investors should carefully monitor industry trends, competitive pressures, and potential risks related to changing consumer preferences and ingredient costs.
