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Hershey financial analyst report

Hershey financial analyst report



This is my financial analyst report about Hershey. I made the part starting from page 4 to 8 as well as all the exhibits.

This is my financial analyst report about Hershey. I made the part starting from page 4 to 8 as well as all the exhibits.



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    Hershey financial analyst report Hershey financial analyst report Document Transcript

    • Section: 2:00 Finance 367: Research Analyst ReportThe Hershey CompanyYi Yang; Pasquale Pacella
    • Yi Yang, Pasquale Pacella. Financial Analyst ReportI. Brief Company OverviewThe story of The Hershey Company begins with the tale of one inspiring and determined pioneer: MiltonS. Hershey. From a farm boy who never received much education to the founder of the largest chocolatemanufacturer in North America and a global leader in sugar confectionary with $16.05 billion marketcapitalization (43% share of the domestic chocolate market), Milton Hershey created a company thatsells its products in 70 countries within North America, Asia, Europe, Middle East, and Africa. The morethan100-year old company offers products, including chocolate and confectionery, snacks, mintrefreshment and gum, baking ingredients, toppings, and beverages, under more than 80 brands. Someof its famous product lines include Hershey’s, Kisses, Reese’s, Twizzlers, Ice Breakers along with U.S.licenses for Cadbury, Caramello, Kit Kat, Rolo, and global licenses for York, Almond Joy, Mounds, Good &Plenty, Health, Jolly Rancher, Milk Duds, and Whoppers. In 2011, the firm generated 84% of its salesfrom the U.S. domestic market. The firm is currently employing 14,000 people worldwide.Hershey’s business model focuses on high volume and low margin. Majority of Hershey’s customers arewholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies,wholesale clubs, convenience stores, dollar stores, concessionaires and department stores. In the yearof 2011, Hershey’s sales to one of its largest customers McLane Company, Inc., accounted for 22.3% ofHershey’s total net sales. McLane Company, Inc. is the primary distributor of Hershey’s products to Wal-Mart Stores, Inc.II. Chart or table summary of Merits and Risks Risks MeritsRelatively higher beta than competitors Higher return and Sharp Ratio than the industry averageIncreasing in prices of key product ingredients, Hedging against currency volatility and commoditysuch as cocoa, peanuts, milk, sugar, etc. price increaseCurrency volatility of international operationsBarrier to enter foreign markets Relatively low sales volatility compare to competitorsGreater competition due to increased Relatively high growth compare to competitorsconsolidation activities in the confectionary (see key ratio analysis)industryMore long term debt than key competitors Strong customer relationshipsDifficulty of management control due to expansion Powerful partnerships with suppliersinto foreign marketsIncreased marketing expense High brand reputationDependence on key suppliers and customers High Involvement in the communityDependence on domestic market Page 1 of 17
    • Yi Yang, Pasquale Pacella. Financial Analyst ReportIII. Industry Overview-The Candy Manufacturing IndustryThe U.S. candy manufacturing industry has approximately 1,600 companies with combined annualrevenue of $20 billion. Major companies include The Hershey Company, Mars, Tootsie Roll Industries,and Russell Stover Candies. Global wise, the candy manufacturing industry generates approximately$150 billion in annual revenue. The big key players outside the U.S. market include Nestle, BarryCallebaut, Cadbury (U.K. based, owned by U.S. company Kraft), Ferrero, and Meiji Holdings.Threat of new entrantsHershey has been a key player in the candy manufacturing Industry for more than 100 years. The threatof new entrants is low due to the existence of economies of scale. The Chocolate manufacturingindustry requires large up-front capital investment. Consumers have established preference and trustfor Hershey’s products; therefore, switching to different products may be costly. In addition, newentrants will not have access to distribution channels. Finally, the new players need to go through thescrutiny of government regulations and inspections, which is also costly.Bargaining power of buyersThe bargaining power of buyers (wholesale distributors, chain grocery stores, mass merchandisers, chaindrug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires anddepartment stores) is relatively low due the existence of buyers’ switching costs. In addition, Hersheyhas already built its brand value among consumers. The general public recognizes and relied on itsproducts.Bargaining power of suppliersThe bargaining power of suppliers is medium to high since the suppliers are concentrated. The keyingredients for Hershey’s products are milk, cocoa, peanut, and sugar. There are not many substitutesfor these raw materials. The successful operation of Hershey largely depends on these suppliers.Threat of substitute products and servicesHershey faces a high threat of substitute products and services due to several reasons. Firstly, Hersheyspecializes in manufacturing chocolate. It needs to compete with alternative flavors, such as vanilla.Secondly, the candy manufacturing industry faces intense competition with other types of snackmanufacturing industries, such as Frito Lay. Finally, some retail industries can also compete with thecandy manufacturers. For instance, candy especially chocolate is used as gifts during special holidayseasons. Hershey has to compete with flower stores, jewelry makers, and other retail stores (especiallywhen people nowadays become more and more health conscious).Rivalry among competitorsAlthough Hershey is one of the few candy makers that specialize in manufacturing chocolate, it still facesfierce competition with the big market players mentioned above. Some of these manufacturers not onlymanufacture well-known chocolate products, but also produce other popular candy brands. In addition,making chocolate does not require superior expertise, and the flavors can be easily replicated, Hersheymay find it difficult to permanently lead the chocolate manufacturing segment.In spite of the intense competition among some key players, The Hershey Company is still Americaslargest chocolate company. It has already established itself as a cultural icon for brand innovation. Page 2 of 17
    • Yi Yang, Pasquale Pacella. Financial Analyst ReportIV. Detailed Company AnalysisThe Hershey Company reported sales revenue of $6.08 billion for the year ending December of 2011,which indicates a 7.2% increase from 2010, when the sales were $5.67 billion. Inspite of the economiccrisis since 2008, the sales revenue at The Hershey Company has been increasing every year since 2006.The total sales revenue of The Hershey Company aggregates to $5.13 billion, of which 84.4% wasgenerated in the U.S. domestic market. The company has been trying to expand into new markets. In2011, sales in foreign markets were up 10%.In the past three years, The Hershey Company’s stock has been increasing in value. At the end of 2008,the stock price was $34.74 per share. The current stock price fluctuates around $70 per share. As of09/28/2012, the company traded at 2.6 times its sales, 16.11 times the book value, 24.1 times itsearning. These multiples were higher than most of Hershey’s competitors.The Hershey Company has been paying dividend for six consecutive years. For the 12 months ending7/1/2012, The Hershey Company paid $1.49 dividend per share, which was equavalent to a dividendyield of 2.1%.Of the $6.08 billion sales reveue in 2011, cost of goods sold totaled $3.29 billion, or 54.1% of sales. Thegross profit margin is slightly higher in 2011 than 2010, in which the cost of goods sold totalled 54.7% ofsales. In fact, the 2011 gross profit margin is the highest of the past five years. The earning beforeextraordinary items at The Hershey Company in 2011 totaled $628.96 million, or 10.3% of sales which ishigher than the 9% in 2010. Since 2008, The Hershey Company’s earnings before extraordinary itemshave increased by a total of 102%. However, the firm’s return on equity in 2011 (69.7%) was slightlylower than 2010 (70.8%).The company’s inventory aggregated $648.95 million as of December 2011. With $3.29 billion cost ofgoods sold in 2011, the firm turned over its inventory 5.1 times in 2011. In other words, The HersheyCompany had 72 days of inventory on hand. This number is higher than the 63 days of sales in inventoryin 2010.In the year of 2011, The Hershey Company incurred $32.20 million expense for resarch anddevelopment, which is equivalent to 0.5% of its sales revenue. In 2010, the firm’s R&D expense totaled$30.50 million, which is also 0.5% of the sales revenue.By December 2011, The Hershey Company had $3.50 billion total liabilities, of which $1.75 billion waslong term debt. The long term debt to equity ratio of the firm was 2.00. The accounts receibale in 2011were $399.50 million, which is equivalent to 24 days of sales, an improvement compare to the 25 daysof sales in 2010.On 7/26/2012, The Hershey Company updated its sales growth to 7%-9% for the fiscal year of 2012. Italso changed its expected earnings per share growth to 12%-14%, compare to the previous estimate of10%-12%.Given the disappointing results of Hershey’s joint venture in India, Hershey Co. said it “agreed to buy outthe minority shareholders in its loss-making Indian candy and beverage venture for an undisclosed sum, Page 3 of 17
    • Yi Yang, Pasquale Pacella. Financial Analyst Reportclearing the decks for the American firm to compete on its own in a market dominated by rivals KraftFoods Inc. and Nestle S.A,” according to an article released by WSJ on September 10, 2012. The HersheyCompany will buy the 43% stake in venture Godrej Hershey from India’s Godrej Industries Ltd. andanother 6% from another unnamed minority shareholder, a press releases from Hershey and Godrej said.Hershey said it will assume about $47.6 million in debt along with the venture’s related manufacturingfacilities, candy brands, and beverage brands. According to J.P Bilbrey, the president and chief executiveat Hershey, since India is an important market, Hershey will make necessary investments in India toaccelerate growth. For the fiscal year ended March 31, 2012, the venture had net sales of $69.73 millionwith losses of $13.37 million. However, The Hershey Company also expressed that it will not change thefinancial outlook provided by its second quarter earnings release. Overall, the company has been veryconfident about its further growth and expansion into new markets.Hershey’s past financial statements indicate that commodities and packaging make up 60% of thecompany’s cost of goods sold. The year of 2012 should proceed smoothly for The Hershey Companysince the firm has been hedging against the commodity inflations for some key ingredents: cocoa, dairy,and sugar. However, the dairy market is highly illiquid and difficult to hedge. Given the dry weatheracross western Africa caused by El Nino, cocoa production may not be able to satisfy the global demandin the future. The prices of sugar have been extremely volatile compare to other agriculturalcommodities.V. Investment RisksHistorical Return and Risk1We discovered that HSY, has yield a stunning 19% compounded annual growth rate in 2007-2012whereas the industry average has a compounded annual growth rate of 8% within the same time span.In addition, the S&P 500 only has a yield of 3%.The chocolate manufacturer has a very low beta, since it works in a consumer staple sector which iswidely recognized as an anti-cyclical business. The unsystematic risk is even lower than the systematicone so we can conclude that HSY has low risk.Both the Sharpe, Treynor and Sortino ratios are above the SP500 and the industry average, this meansthat HSY generated a return that - justifies the overall risk taken by the investor (Sharpe ratio) - justifies the downside risk taken by the investor (Sortino ratio) - justifies the systematic risk taken by the investor (Treynor ratio)The high relative risk (0.27 vs. 0.17 as average and 0.15 for SP5000) does not worry us because it issupported by an outstanding return. This means that a large portion of such relative risk is due to upsiderisk rather than downside risk.1 Please refer to Appendix A Page 4 of 17
    • Yi Yang, Pasquale Pacella. Financial Analyst ReportHershey’s Risk Factors2As a candy manufacturer, The Hershey Company is exposed to the risks caused by volatile commodityprices. The company primary product ingredients include: cocoa, peanuts, milk and sugar.To explore the sensitivity of Hershey’s stock prices, we ran a regression analysis3 on HSY’s weekly stockreturns using the following as independent variables: weekly stock returns of competitors (Kraft Foods,Nestle, Tyson Foods, Tootsie Roll Industries, Kellogg’s), S&P500, cocoa, sugar, oil, and gold prices, as wellas the option market volatility (VIX). We discovered that: HSY’s stock returns have a statisticallysignificant positive correlation with the volatility in financial markets, the interest rates, and some bigmarket players such as Kraft and Tyson Foods.Surprisingly, the prices of cocoa, the main ingredient used in Hershey’s products, do not have astatistically significant correlation with Hershey’s stock returns. This is a sign that the company haseffectively managed to hedge against rises in prices of cocoa using derivatives. However, the companydisclosed that the prices of peanuts are difficult to hedge due to the lack of liquidity of the peanutsderivative market.The Hershey Company is currently holding manufacturing plants in Canada and Mexico. It generated15% of sales revenue abroad in 2011. The firm is also trying to expand in China and India. Therefore, thecompany may face risks caused by volatilities of currency values. However, currency risk may not be asignificant concern because the company disclosed that it has been using derivatives to hedge against it.Another risk of Hershey’s foreign market expansion plan is the possibility that many of those foreignmarkets might have already been breached by Hershey’s competitors. Finally the increasedconsolidation in the global confectionary arena (an example is Kraft’s acquisition of Cadbury) could leadto greater competitive pressure on HSY.Assessing Default Risk Using Altman Z-Score4The regular Z-Score for the food processing industry is 1.6. HSY has the highest Z-Score of 2.66, which farexceeds the industry average and the second-best company (Kellogg’s Z-Score: 1.79).Business Risk, Operating, and Financial Leverage5HSY’ sales volatility, computed as the coefficient of variation of sales revenues in the past 10 years waslower than its competitors (0.126 vs. 0.149). Its 2011 operating leverage was 0.118 which is much lowerthan the industry average (0.665). Thus we can conclude that Hershey has a relatively low business risk.The firm’s financial leverage might seem to be a matter of concern (2.06 vs. the industry average of0.98). However Hershey was also able to generate a cash flow that is 11.8 times higher than interests in2011. In addition, the interest rate paid on debt are equal to 5.15% (5.62% is the average), so we thinkthat the company is using the leverage wisely to elevate the return for stockholders equity.2 Please refer to Appendix B3 Please refer to Appendix C4 Altman Z-Score allows the estimation of a firm’s default risk. Please refer to Appendix D5 Please refer to Appendix E Page 5 of 17
    • Yi Yang, Pasquale Pacella. Financial Analyst ReportVI. Investment MeritsHershey has been generating remarkable high growth in stock price, sales, and earnings. At the moment,it is the leading player in the US chocolate segment, with a 45% market share, far exceeding itscompetitors.By cutting operating expenses through shutting down inefficient plants and reorganizing supply chains,and at the same time raising product prices, Hershey managed to keep a relatively high operatingmargin at 17.35% compare to the industry average of 10.59%. The firm’s merits can be explored in greatdetail through the financial analysis below:Financial Ratios Analysis6The firm’s productivity of labor and capital is one of the highest in the candy industry. Each HSY workergenerates $459,268 of sales versus the industry average of $357,734. It has an asset turnover of 2x. Inaddition, the fixed assets turnover ratio is also higher than the industry average (4.06x vs. 3.80x).Looking at profitability, Hershey’s ROA, ROE, and ROIC are more than doubled the industry average. Thefirm’s ROE is especially outstanding, which is 72% compared to 24% of the industry average.The bad news comes when looking at the free cash flow ratios. It seems that HSY had some problems inturning sales and earnings into free cash flow. Giving a glance at FCF/Sales and FCF/Net Income, wededuce that for every $100 of sales only $3.84 was turned into cash while competitors are able toreceive $7.01 for the same amount of sales.The firm’s liquidity does not worry us. Its quick ratio is far above 1x and quick ratio is roughly one. Bothratios are above the industry average.Looking at growth opportunity, HSY has one of the highest Capex/Sales ratios among its competitors.The sustainable growth rate, which depends on ROE and the payout ratio, is three times the industryaverage. We think the candy manufacturer, with its superb return on shareholders’ equity, should havesolid growth rates in the future.VII. ValuationDCF Assumptions and Results7We presumed the 1928-2011 geometric average return on stock8 as market return, the 1928-2011geometric average return on T-bills as risk free rate. We adopted the beta computed by Value Line9. Thecost of debt has been calculated by dividing the LT interest by the LT debt. We estimated that the cost of6 Using Mondelez, General Mills, Kellogg, Nestle and Tootsie Roll as peers, please refer to Appendix F7 See Appendix I for the DCF valuation8 Please refer to http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html9 We preferred to use Value Line beta because we think betas estimated by us and Yahoo Finance are too low(0.05, 0.03, compared to 0.65 obtained by VL). It is likely that Yahoo Finance and we used data from S&P 500 tocalculate the beta while VL did it with a broader stock index (maybe the Wilshire5000). Page 6 of 17
    • Yi Yang, Pasquale Pacella. Financial Analyst Reportcapital for Hershey is 6.83%10.We used 4% as the terminal value sales growth rate, which could be a little too high if Hershey will notsuccessfully expand in China and India. For this reason we run a series ofsensitivity analysis (i.e. we changed the growth rate to see its effect on Market Return 9.2%predicted fair price). The 4% growth rate gives a fair stock price of $70.16 Risk-Free Rate 3.6%which is approximately equal to the current stock price (around $70). Beta 0.65 Cost of Equity 7.5%In calculating the terminal value, we assumed that HSY’s operating marginequals to the 2011 industry average. Cost of Debt 5%To compute the sales growth, operating margin, CAPEX rates, and net % Debt 11.1%working capital in the period of 2012-2017, we used a linear fading model11. % Equity 88.9% Tax Rate 35%LBO Valuation Model12We used the Leveraged Buyout Valuation to determine the minimum price WACC 6.83%for The Hershey Company. Our assumptions include: 1.4 as interestcoverage ratio, 3.61% as the risk free rate, and 5.62% as the market risk premium. We got $26.94 as thefloor price. Hershey Average Trailing P/E 23.65 18.64Multiples Valuation Forward P/E 19.48 13.86 PEG Ratio 2.37 2.38We used the following firms as comparables: Tootsie Roll, Nestle,Campbell Soup, Heinz Foods, Danone, Kellogg, and General Mills. Price/Sales 2.51 1.59They are all US-based firms which operate in the food processing Price/Book 14.95 5.11industry. EV/Sales 2.74 1.86 EV/EBITDA 12.56 11.05It is possible that our selected comps may not effectively help us predict Hershey’s performance. Forinstance, Nestle has a market capitalization of $210B while TootsieRoll has a market cap of $1.57B. We think the presence the two firms Fair Pricesmay skew our analysis since the industry average market cap becomes Forward P/E $ 68.38$40B while HSY only has market cap of $16B. Price/Sales $ 65.64 EV/EBITDA $ 73.69We ran a multiples valuation excluding Nestle and Tootsie Roll; Overall Avg. $ 67.14however, we got a target price of $44.60. Considering Hershey’s Partial Avg. $ 68.38current market price ($70), and its growth opportunities, we think thetarget price of $44.60 is too low. Hence, we decided to include Nestle and Tootsie Roll.It worth say that it would have been better to include Kraft and Mars13 as comparables; however, wecould not find any public information about both companies.10 Morningstar claimed HSY’s WACC to be 9%. Our result is not so different from that assumed by the firm, but weare sure about assumptions made by us. It is likely that Morningstar consider both/either higher market riskpremium or lower risk free rate.11 Please refer to Appendix G12 Please refer to Appendix H13 Mars is not publicly traded while Kraft’s key stats are not available on Yahoo Finance. Page 7 of 17
    • Yi Yang, Pasquale Pacella. Financial Analyst ReportWe found that it is a common practice among investment firms to use P/E and EV/EBITDA ratios whendealing with food and beverage companies. We calculated an average of fair value prices obtained usingP/E and EV/EBITDA. We got $64.42, which is below the $72.59-$71.79 fair price estimated by our DCFand FCFE analyses.Free Cash Flow to Equity ValuationWe performed a FCFE Valuation using same assumption adopted for DCF analysis and we got almost thesame result obtained through DCF valuation. The predicted fair price for HSY is $71.79.14VIII. RecommendationTo sum up we have $70.16, $71.79, $68.68 as fair prices using DCF, FCFE and Multiple Valuation modelsrespectively. The average is $70.21. We are confident to assume such figure as our target price.Hershey’s stock price was $70.12 as of October 24th, 2012. It does not seem to be much upside potentialfor the stock. Therefore our recommendation is HOLD.15Earlier in our DCF analysis we discovered that using a 3.5% pessimistic sales growth rate in the terminalvalue leaded us to a fair price of $50.67 while a more optimistic 4.5% rate turned into a $86.57 fair price.Therefore we suggest considering buy HSY when it is below $50.67 and consider sell it when it is above$86.5714 See FCFE Valuation Exhibit for more information.15 We’re glad to see that we agree with other analyst’s opinions! Considering a set of 13 analyst reports we get$72.00 and $73.46 as mean and median target price and the mean recommendation is HOLD. Page 8 of 17
    • Appendix I DCF Valuation Exhibit 2011 2012 2013 2014 2015 2016 TerminalSales $6,081 $6,550 $7,000 $7,436 $7,844 $8,216 $8,545Operating Expenses 5,118 5,513 6,014 6,453 6,876 7,274 7,639EBIT (Operating Profit) 963 1,037 986 983 968 943 906Taxes 334 360 342 341 336 327 314NOPAT 629 677 644 642 633 616 592Depreciation 216 232 248 264 278 292 303CapEx 324 349 331 330 325 316 303Change in NWC 166 179 153 122 86 45 0FCF $354 $382 $408 $454 $500 $546 $592Terminal Value $20,899Discounted FCF $382 $398 $410 $16,465Present Value 17654.25 Sales Fair ValuePlus Net Cash 567.30 GrowthMinus Long-Term Debt 1748.6 3.0% $50.18Minus Other Liabilities 617.276 3.5% $58.67Company Value 15855.67 4.0% $70.16Shares Outstanding 226 4.5% $86.57Intrinsic Value Per Share $70.16 5.0% $111.95 Page 9 of 17
    • Appendix II Multiples Valuation Exhibit Hershey Tootsie Nestle Campbell H. J. Tyson Foods Inc. Danone Kellogg Company General Mills Average Roll S.A. Soup HeinzMarket Cap 15.74 1.57 209.09 11.03 18.44 5.8 37.61 18.51 25.29 40.91EV 17.34 1.51 224.27 13.51 22.37 7.47 45.95 26.52 32.56 46.77Trailing P/E 23.65 34.73 19.93 14.6 19.48 12.09 17.21 15.75 15.31 18.63Forward P/E 19.48 N/A 16.6 13.08 15.23 10.34 N/A 14.41 13.51 13.86PEG Ratio 2.37 N/A 3.37 2.92 2.28 1.24 N/A 2.36 2.09 2.37Price/Sales 2.51 2.94 2.25 1.42 1.58 0.18 1.43 1.39 1.51 1.58Price/Book 14.95 2.37 3.49 12.16 7.1 0.99 2.33 8.59 3.83 5.10EV/Sales 2.74 2.81 2.43 1.75 1.93 0.22 1.78 2 1.93 1.85EV/EBITDA 12.56 19.04 13.04 9.09 11.08 4.73 10.31 11.41 9.66 11.04EV/EBITDA ExhibitAverage EV/EBITDA $11.045EBITDA 1565EV 17,285.425Debt 631Equity Value 16,654.425Shares Outstanding 226Fair Value $73.69 Page 10 of 17
    • Appendix III FCFE Valuation ExhibitSales per share from year just ended 26.96 Year FY12 FY13 FY14 FY15 FY16 TerminalFY1-5 Sales Growth Rate 7.00%Profit Margin 22% Sales $ 28.85 $ 30.87 $ 33.03 $ 35.34 $ 37.81 $ 39.14Return on Equity FY1-5 21%Retention Rate FY1-5 55% EPS $ 6.35 $ 6.79 $ 7.27 $ 7.77 $ 8.32 $ 4.15Payout Rate FY1-5 45%Risk Free Rate for FY1-5 2.50% Dividend $ 2.88 $ 3.08 $ 3.30 $ 3.53 $ 3.78 $ 2.07Beta FY1-5 0.65Market Risk Premium FY1-5 5.62% Terminal Value 78.18397Cost of Equity FY1-5 6.15% PV of Cash Flow $ 2.71 $ 2.74 $ 2.76 $ 2.78 $ 60.81Sustainable Growth Rate 4%Profit Margin Sustainable 11% Value of Stock $ 71.79ROE Sustainable 20%Retention Rate Sustainable 50%Sustainable Payout 50%Risk Free Rate (Sustainable) 2.50%Beta (Sustainable) 0.65Risk Premium (Sustainable) 5.62%Cost of Equity (Sustainable) 6.15% Page 11 of 17
    • Appendix A Historical Return and Risks HSY SP500 KFT NSRGY TR TSN K Ind. Avg. 16 CAGR 18.98% 3.14% 10.80% 11.42% 3.55% 3.08% 3.05% 7.72% St. Dev. 12.49 176.56 5.66 10.56 2.14 3.68 4.90 5.39 17 Relative Risk 0.27 0.15 0.19 0.22 0.09 0.24 0.10 0.17 Beta 0.06 1.00 0.03 0.05 0.01 0.02 0.02 0.03 Sharpe Ratio 0.11 0.00 0.12 0.07 0.08 0.04 0.03 0.07 Sortino Ratio 0.0118 0.0001 0.0115 0.0070 0.0077 0.0039 0.0028 0.01 Treynor Ratio 24.01 0.15 23.53 13.14 24.84 8.79 6.20 15.30 Unsystem. Risk 2.46 0.00 0.75 1.14 0.90 0.69 0.71 0.84 Systematic Risk 10.08 176.64 4.92 9.45 1.25 2.99 4.20 4.5616 Compounded annual growth rate calculated on the 2007-2012 period17 Measured as coefficient of variation of the price during 2007-2012 period Page 12 of 17
    • Appendix B Risk Factors Regression Analysis18 Sensitivity to Risk Factors 1,2 1 0,8 0,6 Coefficients 0,4 0,2 0 COCOA SUGAR VIX OIL GOLD BAR SP500 KFT NSRGY TR TSN K -0,2 AGG -0,4 -0,6 -0,8 Statistical significance of Risk Factors 8 6 4 2 t stat 0 COCOA SUGAR VIX OIL GOLD BAR SP500 KFT NSRGY TR TSN K -2 AGG -4 -6 -818 See appendix C for the regression results Page 13 of 17
    • Appendix C Regression Analysis Regression Statistics ANOVAMultiple R 0.9850 df SS MS F Significance FR Square 0.9703 Regression 12 33582.27193 2798.522661 567.6104229 1.1661E-151Adjusted R Square 0.9686 Residual 208 1025.51449 4.930358126Standard Error 2.2204 Total 220 34607.78642Observations 221 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept -64.86084091 11.25493151 -5.762881883 2.95227E-08 -87.04920298 -42.67247885 -87.04920298 -42.67247885 COCOA 0.138334857 0.06022062 2.297134374 0.022606164 0.019613839 0.257055875 0.019613839 0.257055875 SUGAR -0.071810461 0.015971664 -4.496116545 1.14904E-05 -0.103297552 -0.04032337 -0.103297552 -0.04032337 VIX 0.183869137 0.027572169 6.668649757 2.28494E-10 0.129512408 0.238225866 0.129512408 0.238225866 OIL -0.10674579 0.034507482 -3.093409993 0.002250372 -0.174775036 -0.038716544 -0.174775036 -0.038716544 GOLD -0.021734356 0.011114303 -1.955530233 0.051859794 -0.043645479 0.000176767 -0.043645479 0.000176767 BAR AGG 0.67915478 0.129388702 5.24894963 3.76355E-07 0.424073408 0.934236152 0.424073408 0.934236152 SP500 0.022579161 0.005082202 4.442790839 1.44239E-05 0.012559931 0.03259839 0.012559931 0.03259839 KFT 1.017281359 0.162311987 6.267444419 2.08126E-09 0.697293882 1.337268836 0.697293882 1.337268836 NSRGY 0.17160718 0.083849134 2.04661839 0.041953245 0.006304091 0.336910268 0.006304091 0.336910268 TR 0.040825074 0.158226927 0.258015973 0.796649687 -0.271108973 0.352759122 -0.271108973 0.352759122 TSN 0.341994503 0.108512357 3.151664118 0.00186295 0.128069481 0.555919526 0.128069481 0.555919526 K -0.524606468 0.089108239 -5.887294773 1.5562E-08 -0.700277538 -0.348935398 -0.700277538 -0.348935398 Page 14 of 17
    • Appendix D Altman Z-Score HSY MDLZ GIS K NSRGY TR Average Working Capital/Total Assets 0.20 -0.02 -0.01 -0.02 -0.02 0.18 0.05 Retained Earnings/Total Assets 0.07 0.02 0.04 0.05 0.03 0.04 0.04 Equity Mkt Value/Total Assets 0.24 0.07 0.13 0.17 0.00 0.07 0.11 EBIT/Total Assets 0.20 0.37 0.33 0.15 0.52 0.78 0.39 Sales/Total Assets 1.40 0.57 0.84 1.11 0.74 0.62 0.88 Altman Z-Score 2.66 1.02 1.51 1.79 1.07 1.57 1.60 Safe, Grey or Distressed Zone? Safe Distressed Grey Grey Grey Grey Grey Appendix E Business Risk, Operating and Financial Leverage Financials HSY MDLZ GIS K NSRGY TR Average Financial Leverage 5.2 2.66 3.29 6.76 2.01 1.29 3.20 Debt/Equity 2.06 0.66 0.96 2.86 0.11 0.01 0.92 Interest coverage ratio 11.8 7.6 6.7 23.5 12.6 Return on debt % 5.15 6.00 5.41 7.08 4.00 5.62 Business Risk CV(Sales)19 0.126 0.211 0.157 0.159 0.109 0.109 0.149 Operating Leverage20 0.118 1.070 0.404 0.688 0.239 0.923 0.66519 CV stands for coefficient of variation.20 Computed as 10 years average of the ratio between the change of the EBIT out of the change of the sales. Page 15 of 17
    • Appendix F Financial Ratios Analysis21 Financials HSY MDLZ GIS K NSRGY TR AverageEfficiencyRevenue per Employee $459,268 $430,897 $481,751 $431,303 $290,516 $244,204 $375,734Asset Turnover (Average) 1.4 0.57 0.84 1.11 0.74 0.62 0.776Fixed Assets Turnover 4.06 3.94 4.76 4.12 3.68 2.49 3.798ProfitabilityReturn on Assets % 14.48 3.73 7.88 10.37 8.41 5.11 7.1Return on Equity % 71.83 9.93 24.51 62.84 15.99 6.58 23.97Return on Invested Capital % 23.01 5.57 11.57 15.53 11.78 6.51 10.192Free Cash Flow/Sales % 3.84 5.06 10.36 7.58 5.66 6.39 7.01Free Cash Flow/Net Income 0.37 0.78 1.1 0.81 0.5 0.77 0.792LiquidityCurrent Ratio 1.74 0.88 0.96 0.91 0.95 3.64 1.468Quick Ratio 0.93 0.45 0.47 0.5 0.66 2.31 0.878Growth OpportunitiesCap Ex as a % of Sales 5.72 3.26 4.06 4.5 6.01 3.07 4.18Payout Ratio % 50.4 58.3 51.9 49.4 61.1 31.6 50.46Sustainable Growth Rate 36.2 5.79 12.72 31.04 9.77 2.08 12.10Historical Sales Growth3-Year Average 5.81 9.04 4.28 0.97 -8.7 2.39 1.5965-Year Average 4.23 9.61 6.01 3.89 -3.21 1.43 3.54610-Year Average 2.93 4.84 7.68 4.07 -0.13 2.32 3.756 21 2011 Data obtained through Mergent Online Page 16 of 17
    • Appendix G DCF AssumptionsActual Assumed using a linear fading model Assumed 2011 2012 2013 2014 2015 2016 TV 7.72% 6.97% 6.23% 5.49% 4.74% 4.00%15.83% 14.96% 14.09% 13.22% 12.34% 11.47% 10.60%34.68% 34.68% 34.68% 34.68% 34.68% 34.68% 34.68% 5.33% 5.03% 4.73% 4.44% 4.14% 3.85% 3.55% 3.55% 3.55% 3.55% 3.55% 3.55% 3.55% 3.55% 2.74% 2.74% 2.19% 1.64% 1.09% 0.55% 0.00% Appendix H Simple LBO Valuation Model Simple LBO Valuation Model EBIT 962,845,000.00 Interest Coverage Ratio 1.4 Interest 687,746,428.57 Risk Premium 5.62% Treasury Bonds 3.61% Enterprise Value 7,451,207,243.46 Total Price we can pay 9,314,009,054.33 Target Debt Amount 1,993,100,000 Total Excess Cash 567,300,000 After Paying off debt 5,458,107,243.46 Use Excess Cash 6,025,407,243.46 Shares Outstanding 223,654,520.00 Price Per Share 26.94 Page 17 of 17