Financial Analysis Of Hershey Corporation

INTRODUCTION

The Hershey Company is North America's largest manufacturer of quality chocolate and sugar confectionary products. They produce and sell a wide variety of confections from the familiar favorites such as Hershey's, Reese's, and Hershey Kisses to the Ice Breaker line of gums and mints. They have also emerged as the forerunner in the dark and premium chocolate category (http://www.thehersheycompany.com/).

This paper will discuss the history of The Hershey Company, general facts and information pertaining to operations as well as industry statistics including trends and key competitors. Furthermore, this paper will examine the financial position of The Hershey Company, through use of ratio analyses and forecasting models in order to present an overall assessment of the company's financial position.

GENERAL INFORMATION

Company Overview

The Hershey Company was incorporated under the laws of the State of Delaware on October 24,1927 as a successor to a business founded in 1894 by Milton S. Hershey (2006 Annual Report). The Hershey Company manufactures chocolates, confectionary sweets, snacks, toppings, and baking goods. The Hershey Company produces name brands such as Hershey's, Hershey Kisses, Reese's, Ice Breakers, Kit-Kat, and Jolly Ranchers. The Hershey Company has wholly owned subsidiaries; Artisan Confections Company, which markets such premium chocolate offerings as Scharffen Berger, Joseph Schmidt, and Dagoba; as well as Mauna Loa Macadamia Nut Corporation, the world's largest processor and marketer for macadamia nut products (http://www.thehersheycompany.com/ir/) (http://www.maunaloa.com/compinfo.htm).

In addition to being the largest North American manufacturer of quality chocolate and sugar confectionery products The Hershey Company has also begun to develop and deliver single-serve cookies, brownies and value-added snack nuts. In meeting the demand of today's health conscience consumer, Hershey is also producing portion controlled snacks as well as premium dark chocolates providing the benefits of flavanol antioxidants. The Hershey Company completes its dominance of the snack food industry with an Ice Breaker franchise that delivers clean smelling mouths across a variety of gum and mint flavor products. (http://www.thehersheycompany.com/ir/)

The Hershey Company is headquartered in Hershey, Pennsylvania with 2006 revenues nearing $5 Billion dollars and more than 13,000 employees worldwide (http://www.thehersheycompany.com/ir/). The Hershey Company sells its products primarily to wholesale distributors, mass merchandisers, chain grocery stores and the like through representatives and food brokers (http://finance.yahoo.com/q/pr?s=HSY).

The Hershey Company shares trade on the New York Stack Exchange under the ticker symbol HSY, and are currently trading for $45.15 as of August 3, 2007 (MergentOnline). The current market value of The Hershey Company common stock is approximately $10.7 billion dollars, which does not include 60.8 million shares of class B stock that is 97.7% owned by the Hershey Trust (Valueline). The Hershey Company has the second largest market capitalization in the confectioners industry beaten only by William Wrigley Jr. Co. who holds the market capitalization at $15.97 billion dollars (http://finance.yahoo.com/q/in?s=HSY).

The company operates as a single reportable segment in manufacturing, marketing, selling and distributing various package types of chocolate candy, sugar confectionery, refreshment and snack products, and food and beverage enhancers under more than 50 brand names.

For segment reporting The Hershey Company aggregates their operations in the Americas, which comprise the United States, Canada, Mexico and Brazil. They base that aggregation on similar economic characteristics, products and services, production processes, types of customers, distribution methods as well as the similar nature of the regulatory environment. The Hershey Company also aggregates their international operations in such locations as Japan, Korea, the Philippines and China with the Americas to form one reportable segment. When combined the international operations share most of the aggregation criteria and represent less than 10% of consolidated revenues, operating profits and assets.

Industry Overview

The confectionery industry while having some difficulty with consumer demands concerning health seems to be a quite lucrative industry. The food and beverage industry as a whole sustained sales and profitable growth due to improved efficiencies and new and innovative product lines. The major problem in the food and beverage industry continues to be the rising costs of raw materials and the uncertainty of being able to increase the price of their products (MergentOnline.com).

The Hershey Company and other chocolate confectioners are worried with civil unrest in the world's largest cocoa- producing country, The Ivory Coast, where prices have remained volatile. During 2006, cocoa prices traded between .67 and .75 per pound, based on the New York Board of Trade futures contract (The Hershey Company Annual Report). As mentioned earlier, health conscience consumers also play a huge part in the success or failure of this industry. Although the majority of consumers are still purchasing junk food and the like, there are a growing number of consumers that demand a healthier option. Several companies including The Hershey Company, M&M Mars, and Nestle have begun to provide a spectrum of healthier products. According to The Washington Times, companies are going to begin limiting their junk food ad to children under the age of 12. Food safety has also remained a critical concern for this industry (Mergentonline.com).

Key Competitors

Tootsie Roll Industries

Tootsie Roll Industries began in 1896 when Austrian immigrant Leo Hirshfield brought his recipe for a chewy, chocolaty candy to the United States. His recipe has since turned into a product line that consists of such candies as Tootsie Roll, Charm's, Sugar Daddies, and Junior Mints. Tootsie Roll Industries is number 31 on the market capitalization rankings, mostly because of the conservative financial posture and their beliefs of not jeopardizing long-term growth for short-term results (Tootsieroll.com). Tootsie Roll's five year average net profit margin is higher at 15.47% than The Hershey Company's 11.01%, due to smaller product lines and lower interest expense.

Cadbury Schweppes PLC

Cadbury Schweppes PLC is a United Kingdom based company that sells and markets its