Hershey Foods Corporation Carolyn Wright Hershey Foods Corporation manufactures and distributes a wide variety of chocolate and non-chocolate confectionery products. These products include a variety of candy bars, drink mixes, peanut butter, and baking ingredients. They hold important ethics, high quality, and guarantee customer satisfaction. Hershey also participates in preserving the environment. They work hard to minimize waste, and make wrapping materials easy to dispose of responsibly by indicating on the package the proper way to recycle.
They are currently the market leader in their industry. (www.hersheys.com) Hershey is a member of the Food-Confectionery Industry. The growth rate for the last five years for the industry has been 10.7%. The S&P 500 top companies have had a growth rate of 10.3% for the past five years. This means that over the past five years the Food-Confectionery Industry has had a higher growth rate than the top companies in other markets. However, Hershey had a 10.2% growth rate, which in less than top companies, and also has a lower rate than its own industry.
This year Hershey Foods has had a negative 8.4% growth rate. (www.yahoo.com) This decline in growth could be due to problems that Hershey had with a new information system that was started in July. The problem with the system was that orders were not being filled due to shipping problems, which left overcrowding in warehouses. This overcrowding has increased inventory costs, and has also left customers unsatisfied. The company has predicted that the problems with the new system are fixed and inventories should be regulated in the coming quarters. There is an anticipated growth rate of 16.1% for Hershey next year.
This means that the company is confident that it will grow and not decline despite their current problems with shipping. Beta measures the risk of an asset in comparison to the risk that other relative assets have. Average assets have a beta of 1.0. Betas lower than 1 have less risk than the average asset. Respectively a beta over 1 would be more risky than the average asset.
Hershey Foods Corporation has a beta of .39. (www.smithbarney.com) This would indicate that investing in Hershey would be less risky than investing in the average stock. The company’s stock price has remained stable over this semester. As of November 26, 1999 the stock quote is $49 9/16. Over the past two months the stock has fluctuated from $47.625 on October 15th to $52.625 on November 2nd. This is not enough of a change that would label this stock unstable. However, when I researched back to last year’s quotes, I found that at the end of November in 1998 the stock was at a high of $68 7/8. (www.yahoo.com) This high could have been caused by the seasonality that this company has.
Hershey gets busier during back to school, Halloween, Thanksgiving, and Christmas seasons. The reason why the company has not seen highs like that this year could be do to the inventory problems that I mentioned earlier. (www.sec.gov) In August of 1997 the company made 500 million dollars of debt securities were made available. As of October of 1999 half of the securities remained available. 230 million dollars of the company’s common stock was repurchased in February of 1999. This money was used to benefit Milton Hershey School. (www.sec.gov) The company holds 32.2 million dollars worth of Treasury Stock.
The company currently holds 576.8 million dollars worth of debt. This can be borrowed to issue commercial paper. (www.sec.gov) In March of 1997 the company issued 6.95% notes. The money raised from these notes and other debt securities will be used to reduce ongoing debt. Funds will also be used for expanding business ventures, and paying off commercial paper borrowings.
(www.sec.gov) In the year 2001 the company plans on lowering interest rates from 6.7% to 5.8% on notes that are payable in the year 2005. These notes were issued in October of 1999. A firm’s capitol structure can be defined by what percent current liabilities and current equity hold in the company. Hershey Food Corporation currently holds 69% debt and 31% equity. (www.smithbarney.com) This would indicate a relatively high risk when considering investing in this company.
I say this because when paying dividends on common stock there is no guarantee that they will be paid. When a company is in trouble or being sold it is obligated to repay creditors before paying dividends. (Ricci,1999) The amount of debt that Hershey Foods holds surprises me because of the low beta that it has. A company’s PE ratio can be determined by dividing price per share by earnings per share. A high PE ratio means that demand could be high, which could really draw people to invest in it. A low PE ratio could also draw people to invest in it because it could be estimated to be under valued, and the price may go up.
(Ricci, 1999) Hershey’s current PE ratio is 14.87. This means that investors would be willing to pay 14.87 per dollar of current earnings. Earnings per share or EPS can be found by dividing net income by number of shares outstanding. This quarter Hershey Food Corporation’s EPS is .78. During this quarter last year the EPS was .76.
This indicates a growth in net income. Last quarter the firm’s earnings per share was .62. With its current EPS being .78 it can be determined that net income has increased significantly since last quarter. The problems with the new information system decreased sales and the problem is obviously being handled as representatives of Hershey Foods Corporation predicted would be in the SEC filings. This year’s total EPS is estimated to be 2.14.
Next year’s estimated EPS is projected to be 2.49. This means that there is expected to be growth next year. There is a high probability that Hershey Food Corporation’s stock will remain stable over the next six months. During this semester the price did not vary much, and I see no reason for the price to drop. In fact at this time last year the stock price was $68 7/8. If the company is fortunate it may see its stock price rise again.
I can see the price rising due to the Christmas season coming up. It was stated that Hershey has seasonality, and maybe a rise in sales will cause a rise in stock prices. Another reason for a raise in sales could be caused by improvement in shipping and inventory costs. This rise in sales may also cause the stock’s price to go up. In the SEC filings it says that Hershey purchased a pasta company that failed.
Soon after its purchase Hershey sold the pasta business and used the profits to pay debt. With this failure along with the shipping and customer service problems they incurred in July, maybe the company has just had a bad year and stock prices will go back up to the upper sixties where they were last year. Based on this information, if I had to make a solid decision I would predict that stock prices will slowly rise but not jump up too much over the next six months. Business Reports.