Financial Analysis of Hershey Food Corporation

Financial performances of organizations vary depending on the business and marketing strategies that they embrace. Integration of advanced technology within an organization, for instance, contributes to enhanced operational efficiencies and this transforms to improved productivity. Moreover, companies that rely on aggressive marketing and advertisements tend to capture the attention of a large consumer segment, and in the process, they enjoy an increase in the revenues that they generate both in the long-term and in the short-run. Good leadership is also essential in steering a company to grow. In this paper, financial analysis of Hershey Foods Corporation will be conducted, with the focus being on its financial ratios and stock performance.

Background information on the company

Hershey Food Corporation has in the past decade enjoyed sustainability in the market and this is attributed to its ability in producing high-quality products and services that meet consumer tastes and preferences. Having been founded more than 100 years ago, the company’s global dominance has improved significantly and it currently stands as one of the largest manufactures of chocolate around the world. Hershey has specialized in the production of a variety of chocolates and non-chocolate candies. The company has its headquarters in Hershey, Pennsylvania. Diversification in its production base has also contributed to an increase in the firm’s productivity (The Hershey Company, 2016). Michele Buck serves as the president and CEO of the company and is mandated with the role of ensuring that it is aligned with the set goals and objectives. As at the end of 2017, the company had estimated $14,750 employees worldwide. Some of the company’s competitors in the market include Cadbury Company, Tootsie Roll Corporation, and Mondelez Company. According to the firm’s CEO, with the strengthening global economy and incorporation of suitable strategies, Hershey is expected to enjoy sustainable growth in the next three years. The firm’s customers are primarily wholesale distributors, vending companies, department stores and chain drug stores. Majority of the consumers resell the commodities from the Hershey Corporation to the end-buyers (The Hershey Company, 2016).

Rationale for choosing Hershey Company for investment

There are various reasons behind the selection of Hershey Foods Corporation as a company for investment. First and foremost, the organization has been on the market for more than a century and has survived the American Depression of the 1930s, the Asian financial crisis of 1997 and the global financial crisis of 2007. Apparently, this implies that Hershey is an established firm whose foundation can hardly be shaken by economic shocks. The company enjoys global dominance and this was another reason behind the selection of the firm. Despite the competition that it faces from rival firms in the market, it has retained its enhanced productivity. Hershey also has a good relationship with its stakeholders including consumers, shareholders, and the suppliers. Apparently, this has been essential in contributing to expanded consumer base and strengthened loyalty among shareholders. A company that has full support from investors will always benefit in terms of funding and expert knowledge.

Hershey was also selected as an investment platform due to its strong financial position. The company has in the past five years enjoyed an improvement in its financial performance and this has been attributed to various factors including integration of advanced technology in its operations, minimization of its costs of production and the incorporation of unique business strategies. Hershey also enjoys a competitive edge over its rivals in the market. Apparently, with the encouraging financial performance, chances are that investing in the firm may end up contributing to high returns both in the short-term and in the long-term.

Hershey’s reputation and a strong brand was another reason behind it being chosen for investment. The company’s presence in the market for more than 100 years has contributed to an increase in its popularity. Moreover, the company, through its suitable pricing strategy and a dependence on diversification has led to enhanced brand awareness (Williams, Haka, Bettner & Carcello, 2018). Hershey, through its Corporate Social Responsibility, has also been on the frontline in improving the lives of people in communities where it has its operational base. Subsequently, this has led to an improvement in its image. Investors will always prefer investing in organizations that have an excellent reputation and that have strengthened brands.

Finally, the company’s stock performance also played a major role in its selection as an investment platform. After the global financial crisis of 2007-2009, management of the company put in place suitable measures that have been critical in the bolstered organization’s stock performance. Currently, the company’s stock trades at $99.90 and this is quite encouraging to any investor that may be willing to channel his or her investment into it (Hershey Company, 2018).

Financial Analysis

Liquidity

Current ratio

Current ratio measures the ability for an organization to pay off its long-term and short-term debts. The current ratio for the company reduced from 1.159 in 2014 to 0.833 in 2015 but increased slightly to 0.95 in 2016. The figures imply that the ability of the company to clear it’s long-term and short-term financial obligations, on average reduced significantly across the three years (Troy, 2012). The period from 2014 to 2016, witnessed a decline in the firm’s liquidity position.

Quick Ratio

Quick ratio measures the ability of an organization to pay off its short-term debts. The quick ratio of Hershey reduced from 0.747 in 2014 to 0.495 in 2015 but increased to 0.56 in the year ending 2016. On average, it is evident that the quick ratio of the company was on the decline across the three years and this is an indication that its ability in paying off short-term debts reduced during the period.

Leverage

Debt ratio

Debt ratio is used in the measurement of extending of a given organization’s leverage. It shows the proportion of assets that are used in clearing debts. The debt ratio for Hershey increased from 0.73 in the year ending 2014 to 0.85 in 2016. The increase in the debt ratio implies that across the three years, the company’s reliance on assets in settling its debts increased significantly (Troy, 2012). It is also an indication of the firm’s high leverage which poses financial risks. 

Debt-to-equity ratio

Debt-to-equity ratio is used in the measurement of an organization’s debt levels relative to its stock value.  Debt-to-equity ratio for Hershey improved from 2.70 in 2014 to 5.68 in the year ending 2016. The increase in the debt-to-equity ratio is an indication of the firm’s high leverage levels. Moreover, it implies that the company’s reliance on debt funding increased during the period 2014 to 2016.

Profitability ratio

Net profit margin

Net profit margin measures the profitability levels of an organization. The net profit margin for Hershey Foods Corporation dropped from 11.40% in 2014 to 6.93% in 2015 but improved significantly to 9.67% in 2016. The figures show that the profitability levels of the company were varied across the three years. An increase in the net profit margin from 2015 to 2016 shows that the company incorporated various strategies that led to an enhancement in its profitability.

Operating costs

Operating costs for the Hershey Corporation reduced significantly across the two years, and this was attributed to various strategies adopted. Incorporation of advanced technology in most of the company’s system, for instance, helped it cut down most of the expenses that it incurred in the past years (Williams, Haka, Bettner & Carcello, 2018). The firm has also been on the frontline in effectively managing inventory from raw material orders to on-hand inventory. Strengthening of the supply chain and distributional channels can also be instrumental in reducing operational costs.

Stock price analysis

Stock history of the firm in the past one year

The current stock price at the $99 is the lowest the organization has recorded in the past one year. On February 20th, 2017, the company’s stock price stood at $108.90, but this declined to $107.89 in March 14th. On May 22nd 2017, the company recorded the highest stock price at 115.98 and this reduced significantly to $105.73. By September, the stock prices had gained and it was trading at $110.50 on 17th September and this performance of the shares was maintained across October, until 23rd October when it dropped to $105.70. In the next two month, the company enjoyed a significant improvement, with the highest price standing at $114.95 on 18th December (Hershey Company, 2018). Since then, Hershey has experienced a decline in its stock price, only enjoying a slight gain on January 18th 2018 ($111.07). As at the end of trading day on 21st February 2018, the company’s stock stood at $99.90. Most of the investors have been worried about the company’s declining stock trend. However, the company’s CEO assured them that the company has put in place suitable strategies that will contribute to strengthened financial performance, thus a gain in its stock prices.

Stock selected

The current stock price for Hershey Foods Corporation stands at $99.90 and this represents a $5 drop compared to two weeks ago. With the decline in the firm’s stock price, financial analysts have openly argued that the drop in its sales in the recent past has been the primary reason. The firm’s Beta currently stands at -0.02 and this implies that the organization’s security is less volatile compared to the market (Hershey Company, 2018). Despite the fall in the share prices, the company is less exposed to financial risks. However, it is a high time that the management implemented strategies that will contribute to a significant rise in its performance.

Client profile

The client is a 42-year old, American Citizen. He is an employee of the judiciary and works as a corporate lawyer. The client comes from Pennsylvania and other than working as a lawyer, he runs a food restaurant in his hometown. He is interested in investing in a stock that is less risky and one that will yield him high returns both in the short-term and in the long-term. Additionally, he is interested in purchasing shares from a food company.

Primary reason for the selection of the stock

One of the major reason behind the selection of the stock as a suitable investment for the client is that it is currently trading at its lowest. The U.S. economy is expected to grow in the future. Moreover, organizational leadership at Hershey has promised that the company will enjoy enhanced performance in the next five months due to the strategies that they have already put in place. Apparently, this implies that the stock prices are expected to improve. It will thus be necessary for the client to purchase the stocks when they are currently trade at $99.90 and sell them in the future when they gain by more than $10. In so doing, this will contribute to an increase in earnings from the investment.

Another reason behind the selection of the stock is because of its risk level. With a beta of -0.02, it is evident that the stock is less volatile compared to the market and this is essential in that chances for the client incurring losses are minimal (Hershey Company, 2018). By purchasing the stock, the individual will be assured of higher returns and this is attributed to the stability of the organization’s shares. Despite the drop in the stock prices, chances are that in the future, they will strengthen significantly.

After the election of Donald Trump, Dow Jones, strengthened immensely, hitting a record 22,000. Currently, it trades at 24,797.78, an indication that the U.S. stock market is performing well. It is thus expected that Hershey will also bounce from the recent declines in the coming few months.

Risk levels of the stock

There are various risks that are associated with Hershey’s stocks. In this section, attention will be directed to the level of risks facing the stock that the client is interested in purchasing.

Market risk: Market risk is one of the primary risks associated with stocks, and in this case, its level is categorized as high. In the recent past, the Dow Jones has been on the upward spiral and it currently stands at 24,797.78. Most people argue that it may tumble in the future and this may negatively affect the markets. Consequently, the Hershey’s stock prices may also end up crushing, leaving clients experiencing massive losses.

Inflation risk: it is also termed to as purchasing power risk and it is the chance that the cash that may be flowing in the economy in the modern day may not be at the same level in the future. Apparently, purchasing of stocks when they are trading at low prices may not be an assurance that in the future they will gain some value. The client may instead end up recording losses due to inflation.

Liquidity risk: liquidity risk arises when there is sluggishness in the purchase and sale of a given investment, thus making it hard in the minimization of losses (Drakopoulou, 2016). High debts, for instance, may expose an organization to more risks, thus discouraging investments.

Headline risks: headline risks refer to the negative stories on media that may end up negatively hurting an organization. News such as resigning of a CEO, controversies surrounding an organization or improved financial performance a rival firm may end up contributing to a decline in its stock prices, consequently slapping the investors with losses.

Management strategies that can be put in place to minimize the risks

One of the strategies that will be essential in the minimization of the risks will be avoidance. The client will have to study the market before purchasing the stocks. Apparently, this will be vital, in that it will help him identify market trends and the ability to generate high returns.

Another strategy that will be instrumental in the reduction of the risks will be diversification (Williams, Haka, Bettner & Carcello, 2018). In this case, the client will be required to invest in more than two stocks. Subsequently, this will lead to the spreading of risks. The strategy is effective because, in the event of losses recorded in one of the stocks, the rest may yield high earnings.

Recommendations

Based on the financial analysis of the organization, it is evident that it is in a healthy state. With the current stock price of 99.90, it will be advisable for the client to channel his investment. Hershey is an established company that boasts of a large customer base. It is thus expected that in the next few months, its stock prices will improve significantly. The client will thus be required to hold onto the stock until when the prices will improve by more than $10. When the stock prices reach their peak, the client will sell his stock, and in the process, he will gain high returns.

The client will also be required to purchase more than two stocks from the organization. In so doing, this will be a part of the diversification strategy that will in return contribute to the minimization of risks (Subramanyam, 2014). Other than purchasing the current stock, purchasing of extra stocks will give the client an assurance of high earnings, even in the event that one of the generate losses. Apparently, the client will enjoy the value of his investment.

It will also be essential for the client to study the market to determine the most appropriate time for selling the stock (Subramanyam, 2014). Regular visits to the Hershey Company will provide him with the vital knowledge on the performance of the stock market and whether to continue with the investment or consider an alternative.

Conclusion

Hershey Foods Corporation enjoys a strong financial health and this is according to its performance in the past three years. For an investor, it will be essential for him to purchase the firm’s stocks now when they are performing low and sell them at a profit in the future when their prices are at peak. Some of the measures that Hershey can implement in the quest for ensuring that it gains a competitive advantage over its rival in the market include enhancing the efficiency of its inventory management, strengthening of its supply chain and ensuring that it improves the quality of its products. Incorporation of suitable marketing strategies can also be vital in enhancing the firm’s productivity and share value. With firm’s sustainability, it will be advisable for an advisor in a mutual fund to invest a significant amount of money in the organization’s common stock.

References

Drakopoulou, V. (2016). A Review of Fundamental and Technical Stock Analysis Techniques. Journal Of Stock & Forex Trading, 05(01). http://dx.doi.org/10.4172/2168-9458.1000163

Hershey Company. (2018). HSY : Summary for The Hershey Company - Yahoo Finance. Finance.yahoo.com. Retrieved 21 February 2018, from https://finance.yahoo.com/quote/HSY?p=HSY

Subramanyam, K. (2014). Financial statement analysis. New York, NY: McGraw-Hill.

The Hershey Company. B. (2016). The Hershey Company Annual Report-Form 10K, https://www.thehersheycompany.com/content/dam/corporate-us/documents/annual-reports/2016-annual-report-10k.pdf

Troy, L. (2012). Almanac of business and industrial financial ratios. Chicago, IL: CCH.

Williams, J., Haka, S., Bettner, M., & Carcello, J. (2018). Financial accounting. New York, NY: McGraw-Hill Education.

Appendix

Current ratio

Current assets/current liabilities

2014

2.25/1.94=1.159

2015

1.85/2.22=0.833

2016

1.82/1.91=0.95

Quick ratio

(Current assets-inventory)/(current liabilities)

Hershey

2014   

(2.25-0.80)/1.94=0.747

2015

(1.85-0.75)/2.22=0.495

2016

(1.82-0.745)/1.91=0.56

Debt ratio

=Total liabilities/Total assets

Hershey Company

2014

4.11/5.63=0.73

2015

4.3/5.34=0.80

2016

4.7/5.52=0.85

Debt-to-equity ratio

=Total liabilities/Total equity

Hershey Company

2014

4.11/1.52=2.70

2015

4.3/1.05=4.095

2016

4.7/0.827=5.68

Net Profit margin

=Net profit/revenue

Hershey Company

2014

0.846/7.42*100=11.40%

2015

0.512/7.386*100=6.93%

2016

0.720/7.44*100=9.67%

Stock performance of Hershey Company