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The Hershey Company: fairly valued with a margin of safety

|Includes:The Hershey Company (HSY)

I believe Hershey Co. (HSY), at approximately $50/share is fairly valued with a margin of safety on a cash flow valuation basis.

The Hershey Company is the largest confectionary manufacturer in North America, maintaining 43% share of the domestic chocolate market, as noted by Morningstar.comOver the past 80 years, the firm has developed a product portfolio that consists of more than 80 brands including Hershey's, Reese's, Kit Kat, Twizzlers, and Ice Breakers. Hershey's products are sold in more than 50 countries, with around 14% of total sales coming from outside of the United States.

I estimated the firm's WACC at 6.43% using the Capital Asset Pricing Model and the company's recent SEC filings but I'll assume a slightly higher mark, 7.00%.

Recent free cash flows and noted growth rates:

Year FCF $Millions
2000 274
2001 546
2002 493
2003 374
2004 602
2005 267
2006 525
2007 575
2008 257
2009 939
TTM 678
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Average Annual Growth: approx. 43%
CAGR: approx. 15%
Consensus Forecast Industry 5-Year Growth: approx. 14% per year
Consensus Forecast Company 5-Year Growth: approx. 8% per year

Assuming the company achieves a lower 5-year growth rate of 7% per year, and assuming that after the next five years, the company achieves no growth or 0% growth per year forever:

Discounted Cash Flow Valuation

Year FCF $ Millions
0 678
1 725
2 776
3 831
4 889
5 951
Terminal Value 14536
Click to enlarge

The firm's future cash flows, discounted at a WACC of 7.00%, give a present value for the entire firm (Debt + Equity) of $13,754 million. If the firm's fair value of debt is estimated at $2,000 million, then the fair value of the firm's equity could be $11,754 million.

$11,754 million / 227 million outstanding shares is approximately $52 per share and a 20% margin of safety is $42. Assuming all else at HSY meets my standard for good business, I'd buy it today for the long term at $42.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: HSY