Today shares of Hershey have fallen -4.5%, vindicating the analysts who have given the stock an average rating of hold. But could they be wrong? Some factors show that Hershey may actually be undervalued at today's prices, giving long term investors a potentially interesting opportunity.
Over the last year, Hershey shares have moved -7.2% while trading between the prices of $140.13 and $208.03. This represents a -26.8% difference compared to the S&P 500, which moved 19.6% over the last 52 weeks.
At its current price of $175.96 per share, HSY has a trailing price to earnings (P/E) ratio of 23.3 based on its 12 month trailing earnings per share of $7.54. Considering its future earnings estimates of $8.4 per share, the stock's forward P/E ratio is 20.9. In comparison, the average P/E ratio of the Consumer Staples sector is 25.91 and the average P/E ratio of the S&P 500 is 29.3.
We can also compare the ratio of Hershey's price to its book value. A company's book value refers to its present equity value: what is left when we subtract its liabilities from its assets. HSY has a book value of 7.9, with anything close or below one indicating a potentially undervalued company.
A comparison of the share price versus company earnings and book value should be balanced by an analysis of the company's ability to pay its liabilities. One popular metric is the Quick Ratio, or Acid Test, which is the company's current assets minus its inventory and prepaid expenses divided by its current liabilities. Hershey's quick ratio is 0.599. Generally speaking, a quick ratio above 1 signifies that the company is able to meet its liabilities.
The final element of our analysis will touch on Hershey's capacity to generate cash for the benefit of its shareholders or for reinvesting in the business. For this, we look at the company's levered free cash flow, which is the sum of all incoming and outgoing cash flows, including the servicing of current debt and liabilities. Hershey has a free cash flow of $1.93 Billion, which it uses to pay its shareholders a 3.0% dividend.
At Market Inference, we will keep monitoring Hershey to see if the contrarian thesis in this stock will be vindicated. Going against the grain can be an excellent way for investors to extract value from the stock market, but it's never a good idea to apply a strategy for its own sake. Do your own research and make sure that the facts support your decision.
