I believe Hershey Co. ($HSY), at approximately $50/share is fairly valued with a margin of safety on a cash flow valuation basis.
The Hershey Company is the largest confectionary manufacturer in North America, maintaining 43% share of the domestic chocolate market, as noted by Morningstar.com. Over the past 80 years, the firm has developed a product portfolio that consists of more than 80 brands including Hershey's, Reese's, Kit Kat, Twizzlers, and Ice Breakers. Hershey's products are sold in more than 50 countries, with around 14% of total sales coming from outside of the United States.
I estimated the firm's WACC at 6.43% using the Capital Asset Pricing Model and the company's recent SEC filings but I'll assume a slightly higher mark, 7.00%.
Recent free cash flows and noted growth rates:
Year | FCF $Millions |
2000 | 274 |
2001 | 546 |
2002 | 493 |
2003 | 374 |
2004 | 602 |
2005 | 267 |
2006 | 525 |
2007 | 575 |
2008 | 257 |
2009 | 939 |
TTM | 678 |
Average Annual Growth: approx. 43%
CAGR: approx. 15%
Consensus Forecast Industry 5-Year Growth: approx. 14% per year
Consensus Forecast Company 5-Year Growth: approx. 8% per year
CAGR: approx. 15%
Consensus Forecast Industry 5-Year Growth: approx. 14% per year
Consensus Forecast Company 5-Year Growth: approx. 8% per year
Assuming the company achieves a lower 5-year growth rate of 7% per year, and assuming that after the next five years, the company achieves no growth or 0% growth per year forever:
Discounted Cash Flow Valuation
Year | FCF $ Millions |
0 | 678 |
1 | 725 |
2 | 776 |
3 | 831 |
4 | 889 |
5 | 951 |
Terminal Value | 14536 |
The firm's future cash flows, discounted at a WACC of 7.00%, give a present value for the entire firm (Debt + Equity) of $13,754 million. If the firm's fair value of debt is estimated at $2,000 million, then the fair value of the firm's equity could be $11,754 million.
$11,754 million / 227 million outstanding shares is approximately $52 per share and a 20% margin of safety is $42. Assuming all else at $HSY meets my standard for good business, I'd buy it today for the long term at $42.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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