Value Analysis of Hershey Company Every Investor Should Read

Shares of Hershey Company (HSY) jumped 1.4 % during today's afternoon session. The stock seems to be fairly valued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company's strong growth indicators and mixed market sentiment.

The Hershey Company, together with its subsidiaries, engages in the manufacture and sale of confectionery products and pantry items in the United States and internationally. The large-cap Consumer Staples company is based in Hershey, United States and has 18,075 full time employees.

HSY's P/E Ratio Is Comparable to its Sector Average

Compared to the Consumer Staples sector's average of 24.36, Hershey Company has a trailing twelve month price to earnings (P/E) ratio of 28.7 and an expected P/E ratio of 23.0. P/E ratios are calculated by dividing the company's share price by either its trailing 12 month ($8.25) or forward earnings per share ($10.3).

Earnings is another term for the net profits left over after subtracting cost of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Hershey Company's P/E ratio is near its sector average of 24.36, we can deduce that the market is fairly valuing the company's earnings.

Hershey Company Is Overvalued in Terms of Expected Growth

Hershey Company's PEG ratio is 2.63. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Hershey Company's case, it tells us the company is overvalued.

HSY Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Hershey Company's P/B ratio of 14.71 is higher than its sector average of 4.29, such a margin of safety does not exist for the stock.

Investors Stand to Gain from HSY's Cash Flows

Hershey Company has strong cash flows. With a coefficient of variability of 15.1% and an average growth rate of 8.1%, the company is effectively turning its revenue into cash. We calculate Hershey Company's free cash flows by subtracting capital expenditures (long term investments in the business) from its total cash flows from operations. The table below shows us that capital expenditures are evolving at a 13.0% rate, versus 7.2% for operating expenses:

Hershey Company's Margins Are Strong

If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Hershey Company's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.

Hershey Company's Gross Margins

Hershey Company's Operating Margins

Hershey Company's cost of revenue is growing at a rate of -7.9% in contrast to -4.1% for operating expenses. Sales revenues, on the other hand, have experienced a 6.9% growth rate. As a result, the average gross margins growth is -1.2 and the average operating margins growth rate is 0.3, with coefficients of variability of 2.4% and 2.7% respectively.

We See Mixed Market Signals Regarding HSY

Hershey Company has an average rating of hold and target prices ranging from $300.0 to $250.0. At its current price of $236.76, the company is trading -12.46% away from its target price of $270.47. 2.7% of the company's shares are linked to short positions, and 82.2% of the shares are owned by institutional investors.