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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • The Hershey Company: fairly valued with a margin of safety 0 comments
    Feb 7, 2011 4:30 PM | about stocks: 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

    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

    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
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