Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Most Undervalued Companies for the Defensive Investor – December 2014.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Hershey Company (HSY)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â The Hershey Company is a provider of chocolate and sugar confectionery. The Companyâ€™s principal product groups include chocolate and sugar confectionery products; pantry items, such as baking ingredients, toppings and beverages, and gum and mint refreshment products. It manufactures, markets, sells and distributes its products under more than 80 brand names. The Company markets its products in approximately 70 countries across the world. The Companyâ€™s key regions include the North America, including the United States and Canada, and International, including Latin America, Asia, Europe, Africa and exports to these regions. In addition, The Hershey Experience manages its retail operations globally, including Hersheyâ€™s Chocolate World Stores in Hershey, Pennsylvania, New York City, Chicago, Shanghai, Niagara Falls (Ontario), Dubai and Singapore. The Companyâ€™s two strategic business units are the chocolate business unit and the sweets and refreshment business unit.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years -Â PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$49.16|
|Value Based on 0% Growth||$28.82|
|Market Implied Growth Rate||11.77%|
|Net Current Asset Value (NCAV)||-$8.22|
Balance Sheet – SeptemberÂ 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Hershey CompanyÂ is not suitableÂ for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor is concerned with the low current ratio, and the high PEmgÂ and PBÂ ratios. Â The Enterprising Investor is concerned with the level of debt relative to the current assets. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should exploreÂ other opportunities. Â As for a valuation,Â the company appears to be fairlyÂ valuedÂ afterÂ growingÂ its EPSmg (normalized earnings) from $1.80 in 2010 to an estimated $3.39 for 2014. Â This level of growthÂ supports the market’s implied estimate of 11.77% growth, leading the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative toÂ the price.
Be sure to check out previous ModernGraham valuations of Hershey Company (HSY)Â for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Hershey Company (HSY)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold aÂ position in Hershey Company (HSY)Â at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.