Although there is no lack of investment advice in the world, this site aspires to offer something different. Most advice comes from speculators offering predictions and marketers offering exotic investment vehicles or strategies. You will not find any of that here. Instead, you will find brief discussions, well grounded in fact, about specific companies and their underlying business values, as a tool for making rational, businesslike investment decisions.
No detailed discussion of the competitive advantages of The Hershey Company is even required. Despite changes in consumer habits and a shift in power from branded manufacturing to distribution/retail, Hershey remains a strong company in a sector that is currently out of favor. Hershey's strong brands and customer loyalty provide enough predictability to allow a reasonable estimate of its intrinsic value.
In February, Charlie Munger acknowledged that Hershey is a great company but indicated that was not enough because it has to be at the right price. The recent drop of Hershey's stock price to below $90 a share (meaning a market capitalization of less than $19 billion) caught our attention. As Hershey's stock price has moved up in the last couple of trading sessions, we will compare the current market capitalization of $19.35 billion to an estimate of its intrinsic value.
We estimate that Hershey has an intrinsic value of about $20-25B which is not a bargain but is a reasonable price relative to its current market capitalization of $19.35B. To obtain this estimate, we avoided using complex mathematical formulas. We simply calculate the present value of a reasonable estimate of future owner earnings (e.g., for any given year, PV=FV/(1+i)exp(n); where "i" is the discount rate and "n" is the number of years). Specifically, we obtained the sum of the present value of future earnings for a 10 year period of time, starting with the average reported free cash flow for the past three fiscal years of $878M, and using a conservative compound annual increase in free cash flow of 2.5% and a discount rate of 4%, which equals about $8B. Then, to that sum we added the residual value after 10 years based on a discount rate of 5% (and no growth in owner earnings factored in) of about $17B to arrive at the high end of the range of $25B. The low end of the range is based on a simple estimate using owner earning of $800M at a 4% discount rate with no growth. Of course, a higher rate environment could mean that even these conservative estimates of intrinsic value are on the high side. Nonetheless, Hershey, a good company at a fair price, appears to be a reasonable selection for an investment portfolio in view of the alternatives currently available.
Check back soon for our next discussion.
Disclosure: the author and members of the author's family own shares of The Hershey Company. The opinions in this article are solely those of the author and the author in not being paid to write this article. This article is not a recommendation to buy or sell any stock. Each reader should perform their own research prior to making any investments.
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