Hershey financial analyst report

Section: 2:00

Finance 367:
Research Analyst Report
The Hershey Company
Yi Yang; Pasquale Pacella

Yi Yang, Pasquale Pacella. Financial Analyst Report

I. Brief Company Overview

The story of The Hershey Company begins with the tale of one inspiring and determined pioneer: Milton
S. Hershey. From a farm boy who never received much education to the founder of the largest chocolate
manufacturer in North America and a global leader in sugar confectionary with $16.05 billion market
capitalization (43% share of the domestic chocolate market), Milton Hershey created a company that
sells its products in 70 countries within North America, Asia, Europe, Middle East, and Africa. The more
than100-year old company offers products, including chocolate and confectionery, snacks, mint
refreshment and gum, baking ingredients, toppings, and beverages, under more than 80 brands. Some
of its famous product lines include Hershey’s, Kisses, Reese’s, Twizzlers, Ice Breakers along with U.S.
licenses for Cadbury, Caramello, Kit Kat, Rolo, and global licenses for York, Almond Joy, Mounds, Good &
Plenty, Health, Jolly Rancher, Milk Duds, and Whoppers. In 2011, the firm generated 84% of its sales
from the U.S. domestic market. The firm is currently employing 14,000 people worldwide.

Hershey’s business model focuses on high volume and low margin. Majority of Hershey’s customers are
wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies,
wholesale clubs, convenience stores, dollar stores, concessionaires and department stores. In the year
of 2011, Hershey’s sales to one of its largest customers McLane Company, Inc., accounted for 22.3% of
Hershey’s total net sales. McLane Company, Inc. is the primary distributor of Hershey’s products to Wal-
Mart Stores, Inc.

II. Chart or table summary of Merits and Risks

Risks Merits
Relatively higher beta than competitors Higher return and Sharp Ratio than the industry
average
Increasing in prices of key product ingredients, Hedging against currency volatility and commodity
such as cocoa, peanuts, milk, sugar, etc. price increase
Currency volatility of international operations
Barrier to enter foreign markets Relatively low sales volatility compare to
competitors
Greater competition due to increased Relatively high growth compare to competitors
consolidation activities in the confectionary (see key ratio analysis)
industry
More long term debt than key competitors Strong customer relationships
Difficulty of management control due to expansion Powerful partnerships with suppliers
into foreign markets
Increased marketing expense High brand reputation
Dependence on key suppliers and customers High Involvement in the community
Dependence on domestic market

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III. Industry Overview-The Candy Manufacturing Industry

The U.S. candy manufacturing industry has approximately 1,600 companies with combined annual
revenue of $20 billion. Major companies include The Hershey Company, Mars, Tootsie Roll Industries,
and Russell Stover Candies. Global wise, the candy manufacturing industry generates approximately
$150 billion in annual revenue. The big key players outside the U.S. market include Nestle, Barry
Callebaut, Cadbury (U.K. based, owned by U.S. company Kraft), Ferrero, and Meiji Holdings.

Threat of new entrants
Hershey has been a key player in the candy manufacturing Industry for more than 100 years. The threat
of new entrants is low due to the existence of economies of scale. The Chocolate manufacturing
industry requires large up-front capital investment. Consumers have established preference and trust
for Hershey’s products; therefore, switching to different products may be costly. In addition, new
entrants will not have access to distribution channels. Finally, the new players need to go through the
scrutiny of government regulations and inspections, which is also costly.

Bargaining power of buyers
The bargaining power of buyers (wholesale distributors, chain grocery stores, mass merchandisers, chain
drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires and
department stores) is relatively low due the existence of buyers’ switching costs. In addition, Hershey
has already built its brand value among consumers. The general public recognizes and relied on its
products.

Bargaining power of suppliers
The bargaining power of suppliers is medium to high since the suppliers are concentrated. The key
ingredients for Hershey’s products are milk, cocoa, peanut, and sugar. There are not many substitutes
for these raw materials. The successful operation of Hershey largely depends on these suppliers.

Threat of substitute products and services
Hershey faces a high threat of substitute products and services due to several reasons. Firstly, Hershey
specializes in manufacturing chocolate. It needs to compete with alternative flavors, such as vanilla.
Secondly, the candy manufacturing industry faces intense competition with other types of snack
manufacturing industries, such as Frito Lay. Finally, some retail industries can also compete with the
candy manufacturers. For instance, candy especially chocolate is used as gifts during special holiday
seasons. Hershey has to compete with flower stores, jewelry makers, and other retail stores (especially
when people nowadays become more and more health conscious).

Rivalry among competitors
Although Hershey is one of the few candy makers that specialize in manufacturing chocolate, it still faces
fierce competition with the big market players mentioned above. Some of these manufacturers not only
manufacture well-known chocolate products, but also produce other popular candy brands. In addition,
making chocolate does not require superior expertise, and the flavors can be easily replicated, Hershey
may find it difficult to permanently lead the chocolate manufacturing segment.

In spite of the intense competition among some key players, The Hershey Company is still America's
largest chocolate company. It has already established itself as a cultural icon for brand innovation.

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IV. Detailed Company Analysis

The Hershey Company reported sales revenue of $6.08 billion for the year ending December of 2011,
which indicates a 7.2% increase from 2010, when the sales were $5.67 billion. Inspite of the economic
crisis since 2008, the sales revenue at The Hershey Company has been increasing every year since 2006.

The total sales revenue of The Hershey Company aggregates to $5.13 billion, of which 84.4% was
generated in the U.S. domestic market. The company has been trying to expand into new markets. In
2011, sales in foreign markets were up 10%.

In the past three years, The Hershey Company’s stock has been increasing in value. At the end of 2008,
the stock price was $34.74 per share. The current stock price fluctuates around $70 per share. As of
09/28/2012, the company traded at 2.6 times its sales, 16.11 times the book value, 24.1 times its
earning. These multiples were higher than most of Hershey’s competitors.

The Hershey Company has been paying dividend for six consecutive years. For the 12 months ending
7/1/2012, The Hershey Company paid $1.49 dividend per share, which was equavalent to a dividend
yield of 2.1%.

Of the $6.08 billion sales reveue in 2011, cost of goods sold totaled $3.29 billion, or 54.1% of sales. The
gross profit margin is slightly higher in 2011 than 2010, in which the cost of goods sold totalled 54.7% of
sales. In fact, the 2011 gross profit margin is the highest of the past five years. The earning before
extraordinary items at The Hershey Company in 2011 totaled $628.96 million, or 10.3% of sales which is
higher than the 9% in 2010. Since 2008, The Hershey Company’s earnings before extraordinary items
have increased by a total of 102%. However, the firm’s return on equity in 2011 (69.7%) was slightly
lower than 2010 (70.8%).

The company’s inventory aggregated $648.95 million as of December 2011. With $3.29 billion cost of
goods sold in 2011, the firm turned over its inventory 5.1 times in 2011. In other words, The Hershey
Company had 72 days of inventory on hand. This number is higher than the 63 days of sales in inventory
in 2010.

In the year of 2011, The Hershey Company incurred $32.20 million expense for resarch and
development, which is equivalent to 0.5% of its sales revenue. In 2010, the firm’s R&D expense totaled
$30.50 million, which is also 0.5% of the sales revenue.

By December 2011, The Hershey Company had $3.50 billion total liabilities, of which $1.75 billion was
long term debt. The long term debt to equity ratio of the firm was 2.00. The accounts receibale in 2011
were $399.50 million, which is equivalent to 24 days of sales, an improvement compare to the 25 days
of sales in 2010.

On 7/26/2012, The Hershey Company updated its sales growth to 7%-9% for the fiscal year of 2012. It
also changed its expected earnings per share growth to 12%-14%, compare to the previous estimate of
10%-12%.

Given the disappointing results of Hershey’s joint venture in India, Hershey Co. said it “agreed to buy out
the minority shareholders in its loss-making Indian candy and beverage venture for an undisclosed sum,

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clearing the decks for the American firm to compete on its own in a market dominated by rivals Kraft
Foods Inc. and Nestle S.A,” according to an article released by WSJ on September 10, 2012. The Hershey
Company will buy the 43% stake in venture Godrej Hershey from India’s Godrej Industries Ltd. and
another 6% from another unnamed minority shareholder, a press releases from Hershey and Godrej said.
Hershey said it will assume about $47.6 million in debt along with the venture’s related manufacturing
facilities, candy brands, and beverage brands. According to J.P Bilbrey, the president and chief executive
at Hershey, since India is an important market, Hershey will make necessary investments in India to
accelerate growth. For the fiscal year ended March 31, 2012, the venture had net sales of $69.73 million
with losses of $13.37 million. However, The Hershey Company also expressed that it will not change the
financial outlook provided by its second quarter earnings release. Overall, the company has been very
confident about its further growth and expansion into new markets.

Hershey’s past financial statements indicate that commodities and packaging make up 60% of the
company’s cost of goods sold. The year of 2012 should proceed smoothly for The Hershey Company
since the firm has been hedging against the commodity inflations for some key ingredents: cocoa, dairy,
and sugar. However, the dairy market is highly illiquid and difficult to hedge. Given the dry weather
across western Africa caused by El Nino, cocoa production may not be able to satisfy the global demand
in the future. The prices of sugar have been extremely volatile compare to other agricultural
commodities.

V. Investment Risks

Historical Return and Risk1
We discovered that HSY, has yield a stunning 19% compounded annual growth rate in 2007-2012
whereas the industry average has a compounded annual growth rate of 8% within the same time span.
In addition, the S&P 500 only has a yield of 3%.

The chocolate manufacturer has a very low beta, since it works in a consumer staple sector which is
widely recognized as an anti-cyclical business. The unsystematic risk is even lower than the systematic
one so we can conclude that HSY has low risk.

Both the Sharpe, Treynor and Sortino ratios are above the SP500 and the industry average, this means
that HSY generated a return that
- justifies the overall risk taken by the investor (Sharpe ratio)
- justifies the downside risk taken by the investor (Sortino ratio)
- justifies the systematic risk taken by the investor (Treynor ratio)
The high relative risk (0.27 vs. 0.17 as average and 0.15 for SP5000) does not worry us because it is
supported by an outstanding return. This means that a large portion of such relative risk is due to upside
risk rather than downside risk.

1
Please refer to Appendix A

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Hershey’s Risk Factors2
As a candy manufacturer, The Hershey Company is exposed to the risks caused by volatile commodity
prices. The company primary product ingredients include: cocoa, peanuts, milk and sugar.

To explore the sensitivity of Hershey’s stock prices, we ran a regression analysis3 on HSY’s weekly stock
returns using the following as independent variables: weekly stock returns of competitors (Kraft Foods,
Nestle, Tyson Foods, Tootsie Roll Industries, Kellogg’s), S&P500, cocoa, sugar, oil, and gold prices, as well
as the option market volatility (VIX). We discovered that: HSY’s stock returns have a statistically
significant positive correlation with the volatility in financial markets, the interest rates, and some big
market players such as Kraft and Tyson Foods.

Surprisingly, the prices of cocoa, the main ingredient used in Hershey’s products, do not have a
statistically significant correlation with Hershey’s stock returns. This is a sign that the company has
effectively managed to hedge against rises in prices of cocoa using derivatives. However, the company
disclosed that the prices of peanuts are difficult to hedge due to the lack of liquidity of the peanuts
derivative market.

The Hershey Company is currently holding manufacturing plants in Canada and Mexico. It generated
15% of sales revenue abroad in 2011. The firm is also trying to expand in China and India. Therefore, the
company may face risks caused by volatilities of currency values. However, currency risk may not be a
significant concern because the company disclosed that it has been using derivatives to hedge against it.
Another risk of Hershey’s foreign market expansion plan is the possibility that many of those foreign
markets might have already been breached by Hershey’s competitors. Finally the increased
consolidation in the global confectionary arena (an example is Kraft’s acquisition of Cadbury) could lead
to greater competitive pressure on HSY.

Assessing Default Risk Using Altman Z-Score4
The regular Z-Score for the food processing industry is 1.6. HSY has the highest Z-Score of 2.66, which far
exceeds the industry average and the second-best company (Kellogg’s Z-Score: 1.79).

Business Risk, Operating, and Financial Leverage5
HSY’ sales volatility, computed as the coefficient of variation of sales revenues in the past 10 years was
lower than its competitors (0.126 vs. 0.149). Its 2011 operating leverage was 0.118 which is much lower
than the industry average (0.665). Thus we can conclude that Hershey has a relatively low business risk.

The firm’s financial leverage might seem to be a matter of concern (2.06 vs. the industry average of
0.98). However Hershey was also able to generate a cash flow that is 11.8 times higher than interests in
2011. In addition, the interest rate paid on debt are equal to 5.15% (5.62% is the average), so we think
that the company is using the leverage wisely to elevate the return for stockholders equity.

2
Please refer to Appendix B
3
Please refer to Appendix C
4
Altman Z-Score allows the estimation of a firm’s default risk. Please refer to Appendix D
5
Please refer to Appendix E

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VI. Investment Merits

Hershey has been generating remarkable high growth in stock price, sales, and earnings. At the moment,
it is the leading player in the US chocolate segment, with a 45% market share, far exceeding its
competitors.

By cutting operating expenses through shutting down inefficient plants and reorganizing supply chains,
and at the same time raising product prices, Hershey managed to keep a relatively high operating
margin at 17.35% compare to the industry average of 10.59%. The firm’s merits can be explored in great
detail through the financial analysis below:

Financial Ratios Analysis6

The firm’s productivity of labor and capital is one of the highest in the candy industry. Each HSY worker
generates $459,268 of sales versus the industry average of $357,734. It has an asset turnover of 2x. In
addition, the fixed assets turnover ratio is also higher than the industry average (4.06x vs. 3.80x).

Looking at profitability, Hershey’s ROA, ROE, and ROIC are more than doubled the industry average. The
firm’s ROE is especially outstanding, which is 72% compared to 24% of the industry average.

The bad news comes when looking at the free cash flow ratios. It seems that HSY had some problems in
turning sales and earnings into free cash flow. Giving a glance at FCF/Sales and FCF/Net Income, we
deduce that for every $100 of sales only $3.84 was turned into cash while competitors are able to
receive $7.01 for the same amount of sales.

The firm’s liquidity does not worry us. Its quick ratio is far above 1x and quick ratio is roughly one. Both
ratios are above the industry average.

Looking at growth opportunity, HSY has one of the highest Capex/Sales ratios among its competitors.
The sustainable growth rate, which depends on ROE and the payout ratio, is three times the industry
average. We think the candy manufacturer, with its superb return on shareholders’ equity, should have
solid growth rates in the future.

VII. Valuation

DCF Assumptions and Results7
We presumed the 1928-2011 geometric average return on stock8 as market return, the 1928-2011
geometric average return on T-bills as risk free rate. We adopted the beta computed by Value Line9. The
cost of debt has been calculated by dividing the LT interest by the LT debt. We estimated that the cost of

6 Using Mondelez, General Mills, Kellogg, Nestle and Tootsie Roll as peers, please refer to Appendix F
7
See Appendix I for the DCF valuation
8
Please refer to http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
9
We preferred to use Value Line beta because we think betas estimated by us and Yahoo Finance are too low
(0.05, 0.03, compared to 0.65 obtained by VL). It is likely that Yahoo Finance and we used data from S&P 500 to
calculate the beta while VL did it with a broader stock index (maybe the Wilshire5000).

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capital for Hershey is 6.83%10.

We used 4% as the terminal value sales growth rate, which could be a little too high if Hershey will not
successfully expand in China and India. For this reason we run a series of
sensitivity analysis (i.e. we changed the growth rate to see its effect on Market Return 9.2%
predicted fair price). The 4% growth rate gives a fair stock price of $70.16 Risk-Free Rate 3.6%
which is approximately equal to the current stock price (around $70). Beta 0.65
Cost of Equity 7.5%
In calculating the terminal value, we assumed that HSY’s operating margin
equals to the 2011 industry average. Cost of Debt 5%

To compute the sales growth, operating margin, CAPEX rates, and net
% Debt 11.1%
working capital in the period of 2012-2017, we used a linear fading model11.
% Equity 88.9%
Tax Rate 35%
LBO Valuation Model12
We used the Leveraged Buyout Valuation to determine the minimum price
WACC 6.83%
for The Hershey Company. Our assumptions include: 1.4 as interest
coverage ratio, 3.61% as the risk free rate, and 5.62% as the market risk premium. We got $26.94 as the
floor price. Hershey Average
Trailing P/E 23.65 18.64
Multiples Valuation
Forward P/E 19.48 13.86
PEG Ratio 2.37 2.38
We used the following firms as comparables: Tootsie Roll, Nestle,
Campbell Soup, Heinz Foods, Danone, Kellogg, and General Mills. Price/Sales 2.51 1.59
They are all US-based firms which operate in the food processing Price/Book 14.95 5.11
industry. EV/Sales 2.74 1.86
EV/EBITDA 12.56 11.05
It is possible that our selected comps may not effectively help us predict Hershey’s performance. For
instance, Nestle has a market capitalization of $210B while Tootsie
Roll has a market cap of $1.57B. We think the presence the two firms Fair Prices
may skew our analysis since the industry average market cap becomes Forward P/E $ 68.38
$40B while HSY only has market cap of $16B. Price/Sales $ 65.64
EV/EBITDA $ 73.69
We ran a multiples valuation excluding Nestle and Tootsie Roll; Overall Avg. $ 67.14
however, we got a target price of $44.60. Considering Hershey’s
Partial Avg. $ 68.38
current market price ($70), and its growth opportunities, we think the
target price of $44.60 is too low. Hence, we decided to include Nestle and Tootsie Roll.

It worth say that it would have been better to include Kraft and Mars13 as comparables; however, we
could not find any public information about both companies.

10
Morningstar claimed HSY’s WACC to be 9%. Our result is not so different from that assumed by the firm, but we
are sure about assumptions made by us. It is likely that Morningstar consider both/either higher market risk
premium or lower risk free rate.
11
Please refer to Appendix G
12
Please refer to Appendix H
13
Mars is not publicly traded while Kraft’s key stats are not available on Yahoo Finance.

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We found that it is a common practice among investment firms to use P/E and EV/EBITDA ratios when
dealing with food and beverage companies. We calculated an average of fair value prices obtained using
P/E and EV/EBITDA. We got $64.42, which is below the $72.59-$71.79 fair price estimated by our DCF
and FCFE analyses.

Free Cash Flow to Equity Valuation
We performed a FCFE Valuation using same assumption adopted for DCF analysis and we got almost the
same result obtained through DCF valuation. The predicted fair price for HSY is $71.79.14

VIII. Recommendation
To sum up we have $70.16, $71.79, $68.68 as fair prices using DCF, FCFE and Multiple Valuation models
respectively. The average is $70.21. We are confident to assume such figure as our target price.
Hershey’s stock price was $70.12 as of October 24th, 2012. It does not seem to be much upside potential
for the stock. Therefore our recommendation is HOLD.15

Earlier in our DCF analysis we discovered that using a 3.5% pessimistic sales growth rate in the terminal
value leaded us to a fair price of $50.67 while a more optimistic 4.5% rate turned into a $86.57 fair price.
Therefore we suggest considering buy HSY when it is below $50.67 and consider sell it when it is above
$86.57

14
See FCFE Valuation Exhibit for more information.
15
We’re glad to see that we agree with other analyst’s opinions! Considering a set of 13 analyst reports we get
$72.00 and $73.46 as mean and median target price and the mean recommendation is HOLD.

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Appendix I
DCF Valuation Exhibit

2011 2012 2013 2014 2015 2016 Terminal
Sales $6,081 $6,550 $7,000 $7,436 $7,844 $8,216 $8,545
Operating Expenses 5,118 5,513 6,014 6,453 6,876 7,274 7,639
EBIT (Operating Profit) 963 1,037 986 983 968 943 906
Taxes 334 360 342 341 336 327 314
NOPAT 629 677 644 642 633 616 592
Depreciation 216 232 248 264 278 292 303
CapEx 324 349 331 330 325 316 303
Change in NWC 166 179 153 122 86 45 0

FCF $354 $382 $408 $454 $500 $546 $592
Terminal Value $20,899
Discounted FCF $382 $398 $410 $16,465

Present Value 17654.25 Sales
Fair Value
Plus Net Cash 567.30 Growth
Minus Long-Term Debt 1748.6 3.0% $50.18
Minus Other Liabilities 617.276 3.5% $58.67
Company Value 15855.67 4.0% $70.16
Shares Outstanding 226 4.5% $86.57
Intrinsic Value Per Share $70.16 5.0% $111.95

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Appendix II
Multiples Valuation Exhibit

Hershey Tootsie Nestle Campbell H. J. Tyson Foods Inc. Danone Kellogg Company General Mills Average
Roll S.A. Soup Heinz
Market Cap 15.74 1.57 209.09 11.03 18.44 5.8 37.61 18.51 25.29 40.91

EV 17.34 1.51 224.27 13.51 22.37 7.47 45.95 26.52 32.56 46.77

Trailing P/E 23.65 34.73 19.93 14.6 19.48 12.09 17.21 15.75 15.31 18.63

Forward P/E 19.48 N/A 16.6 13.08 15.23 10.34 N/A 14.41 13.51 13.86

PEG Ratio 2.37 N/A 3.37 2.92 2.28 1.24 N/A 2.36 2.09 2.37

Price/Sales 2.51 2.94 2.25 1.42 1.58 0.18 1.43 1.39 1.51 1.58

Price/Book 14.95 2.37 3.49 12.16 7.1 0.99 2.33 8.59 3.83 5.10

EV/Sales 2.74 2.81 2.43 1.75 1.93 0.22 1.78 2 1.93 1.85

EV/EBITDA 12.56 19.04 13.04 9.09 11.08 4.73 10.31 11.41 9.66 11.04

EV/EBITDA Exhibit
Average EV/EBITDA $11.045
EBITDA 1565
EV 17,285.425
Debt 631
Equity Value 16,654.425
Shares Outstanding 226
Fair Value $73.69

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Appendix III
FCFE Valuation Exhibit
Sales per share from year just ended 26.96 Year FY12 FY13 FY14 FY15 FY16 Terminal
FY1-5 Sales Growth Rate 7.00%
Profit Margin 22% Sales $ 28.85 $ 30.87 $ 33.03 $ 35.34 $ 37.81 $ 39.14
Return on Equity FY1-5 21%
Retention Rate FY1-5 55% EPS $ 6.35 $ 6.79 $ 7.27 $ 7.77 $ 8.32 $ 4.15
Payout Rate FY1-5 45%
Risk Free Rate for FY1-5 2.50% Dividend $ 2.88 $ 3.08 $ 3.30 $ 3.53 $ 3.78 $ 2.07
Beta FY1-5 0.65
Market Risk Premium FY1-5 5.62% Terminal Value 78.18397
Cost of Equity FY1-5 6.15%
PV of Cash Flow $ 2.71 $ 2.74 $ 2.76 $ 2.78 $ 60.81
Sustainable Growth Rate 4%
Profit Margin Sustainable 11% Value of Stock $ 71.79
ROE Sustainable 20%
Retention Rate Sustainable 50%
Sustainable Payout 50%
Risk Free Rate (Sustainable) 2.50%
Beta (Sustainable) 0.65
Risk Premium (Sustainable) 5.62%
Cost of Equity (Sustainable) 6.15%

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Appendix A
Historical Return and Risks

HSY SP500 KFT NSRGY TR TSN K Ind. Avg.
16
CAGR 18.98% 3.14% 10.80% 11.42% 3.55% 3.08% 3.05% 7.72%
St. Dev. 12.49 176.56 5.66 10.56 2.14 3.68 4.90 5.39
17
Relative Risk 0.27 0.15 0.19 0.22 0.09 0.24 0.10 0.17
Beta 0.06 1.00 0.03 0.05 0.01 0.02 0.02 0.03
Sharpe Ratio 0.11 0.00 0.12 0.07 0.08 0.04 0.03 0.07
Sortino Ratio 0.0118 0.0001 0.0115 0.0070 0.0077 0.0039 0.0028 0.01
Treynor Ratio 24.01 0.15 23.53 13.14 24.84 8.79 6.20 15.30
Unsystem. Risk 2.46 0.00 0.75 1.14 0.90 0.69 0.71 0.84
Systematic Risk 10.08 176.64 4.92 9.45 1.25 2.99 4.20 4.56

16
Compounded annual growth rate calculated on the 2007-2012 period
17
Measured as coefficient of variation of the price during 2007-2012 period

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Appendix B
Risk Factors Regression Analysis18

Sensitivity to Risk Factors
1,2
1
0,8
0,6
Coefficients

0,4
0,2
0
COCOA SUGAR VIX OIL GOLD BAR SP500 KFT NSRGY TR TSN K
-0,2
AGG
-0,4
-0,6
-0,8

Statistical significance of Risk Factors
8

6

4

2
t stat

0
COCOA SUGAR VIX OIL GOLD BAR SP500 KFT NSRGY TR TSN K
-2 AGG

-4

-6

-8

18
See appendix C for the regression results

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Appendix C
Regression Analysis

Regression Statistics ANOVA
Multiple R 0.9850 df SS MS F Significance F
R Square 0.9703 Regression 12 33582.27193 2798.522661 567.6104229 1.1661E-151
Adjusted R Square 0.9686 Residual 208 1025.51449 4.930358126
Standard Error 2.2204 Total 220 34607.78642
Observations 221

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -64.86084091 11.25493151 -5.762881883 2.95227E-08 -87.04920298 -42.67247885 -87.04920298 -42.67247885
COCOA 0.138334857 0.06022062 2.297134374 0.022606164 0.019613839 0.257055875 0.019613839 0.257055875
SUGAR -0.071810461 0.015971664 -4.496116545 1.14904E-05 -0.103297552 -0.04032337 -0.103297552 -0.04032337
VIX 0.183869137 0.027572169 6.668649757 2.28494E-10 0.129512408 0.238225866 0.129512408 0.238225866
OIL -0.10674579 0.034507482 -3.093409993 0.002250372 -0.174775036 -0.038716544 -0.174775036 -0.038716544
GOLD -0.021734356 0.011114303 -1.955530233 0.051859794 -0.043645479 0.000176767 -0.043645479 0.000176767
BAR AGG 0.67915478 0.129388702 5.24894963 3.76355E-07 0.424073408 0.934236152 0.424073408 0.934236152
SP500 0.022579161 0.005082202 4.442790839 1.44239E-05 0.012559931 0.03259839 0.012559931 0.03259839
KFT 1.017281359 0.162311987 6.267444419 2.08126E-09 0.697293882 1.337268836 0.697293882 1.337268836
NSRGY 0.17160718 0.083849134 2.04661839 0.041953245 0.006304091 0.336910268 0.006304091 0.336910268
TR 0.040825074 0.158226927 0.258015973 0.796649687 -0.271108973 0.352759122 -0.271108973 0.352759122
TSN 0.341994503 0.108512357 3.151664118 0.00186295 0.128069481 0.555919526 0.128069481 0.555919526
K -0.524606468 0.089108239 -5.887294773 1.5562E-08 -0.700277538 -0.348935398 -0.700277538 -0.348935398

Page 14 of 17

Appendix D
Altman Z-Score
HSY MDLZ GIS K NSRGY TR Average
Working Capital/Total Assets 0.20 -0.02 -0.01 -0.02 -0.02 0.18 0.05
Retained Earnings/Total Assets 0.07 0.02 0.04 0.05 0.03 0.04 0.04
Equity Mkt Value/Total Assets 0.24 0.07 0.13 0.17 0.00 0.07 0.11
EBIT/Total Assets 0.20 0.37 0.33 0.15 0.52 0.78 0.39
Sales/Total Assets 1.40 0.57 0.84 1.11 0.74 0.62 0.88
Altman Z-Score 2.66 1.02 1.51 1.79 1.07 1.57 1.60
Safe, Grey or Distressed Zone? Safe Distressed Grey Grey Grey Grey Grey

Appendix E
Business Risk, Operating and Financial Leverage

Financials HSY MDLZ GIS K NSRGY TR Average
Financial Leverage 5.2 2.66 3.29 6.76 2.01 1.29 3.20
Debt/Equity 2.06 0.66 0.96 2.86 0.11 0.01 0.92
Interest coverage ratio 11.8 7.6 6.7 23.5 12.6
Return on debt % 5.15 6.00 5.41 7.08 4.00 5.62
Business Risk
CV(Sales)19 0.126 0.211 0.157 0.159 0.109 0.109 0.149
Operating Leverage20 0.118 1.070 0.404 0.688 0.239 0.923 0.665

19
CV stands for coefficient of variation.
20
Computed as 10 years average of the ratio between the change of the EBIT out of the change of the sales.

Page 15 of 17

Appendix F
Financial Ratios Analysis21

Financials HSY MDLZ GIS K NSRGY TR Average
Efficiency
Revenue per Employee $459,268 $430,897 $481,751 $431,303 $290,516 $244,204 $375,734
Asset Turnover (Average) 1.4 0.57 0.84 1.11 0.74 0.62 0.776
Fixed Assets Turnover 4.06 3.94 4.76 4.12 3.68 2.49 3.798

Profitability
Return on Assets % 14.48 3.73 7.88 10.37 8.41 5.11 7.1
Return on Equity % 71.83 9.93 24.51 62.84 15.99 6.58 23.97
Return on Invested Capital % 23.01 5.57 11.57 15.53 11.78 6.51 10.192
Free Cash Flow/Sales % 3.84 5.06 10.36 7.58 5.66 6.39 7.01
Free Cash Flow/Net Income 0.37 0.78 1.1 0.81 0.5 0.77 0.792

Liquidity
Current Ratio 1.74 0.88 0.96 0.91 0.95 3.64 1.468
Quick Ratio 0.93 0.45 0.47 0.5 0.66 2.31 0.878

Growth Opportunities
Cap Ex as a % of Sales 5.72 3.26 4.06 4.5 6.01 3.07 4.18
Payout Ratio % 50.4 58.3 51.9 49.4 61.1 31.6 50.46
Sustainable Growth Rate 36.2 5.79 12.72 31.04 9.77 2.08 12.10

Historical Sales Growth
3-Year Average 5.81 9.04 4.28 0.97 -8.7 2.39 1.596
5-Year Average 4.23 9.61 6.01 3.89 -3.21 1.43 3.546
10-Year Average 2.93 4.84 7.68 4.07 -0.13 2.32 3.756

21
2011 Data obtained through Mergent Online

Page 16 of 17

Appendix G
DCF Assumptions

Actual Assumed using a linear fading model Assumed
2011 2012 2013 2014 2015 2016 TV
7.72% 6.97% 6.23% 5.49% 4.74% 4.00%
15.83% 14.96% 14.09% 13.22% 12.34% 11.47% 10.60%
34.68% 34.68% 34.68% 34.68% 34.68% 34.68% 34.68%
5.33% 5.03% 4.73% 4.44% 4.14% 3.85% 3.55%
3.55% 3.55% 3.55% 3.55% 3.55% 3.55% 3.55%
2.74% 2.74% 2.19% 1.64% 1.09% 0.55% 0.00%

Appendix H
Simple LBO Valuation Model

Simple LBO Valuation Model
EBIT 962,845,000.00
Interest Coverage Ratio 1.4
Interest 687,746,428.57
Risk Premium 5.62%
Treasury Bonds 3.61%
Enterprise Value 7,451,207,243.46
Total Price we can pay 9,314,009,054.33
Target Debt Amount 1,993,100,000
Total Excess Cash 567,300,000
After Paying off debt 5,458,107,243.46
Use Excess Cash 6,025,407,243.46
Shares Outstanding 223,654,520.00
Price Per Share 26.94

Page 17 of 17

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