Section: 2:00

Finance 367: Research Analyst Report

The Hershey Company
Yi Yang; Pasquale Pacella

Yi Yang, Pasquale Pacella. Financial Analyst Report

I. Brief Company Overview

The story of The Hershey Company begins with the tale of one inspiring and determined pioneer: Milton S. Hershey. From a farm boy who never received much education to the founder of the largest chocolate manufacturer in North America and a global leader in sugar confectionary with $16.05 billion market capitalization (43% share of the domestic chocolate market), Milton Hershey created a company that sells its products in 70 countries within North America, Asia, Europe, Middle East, and Africa. The more than100-year old company offers products, including chocolate and confectionery, snacks, mint refreshment and gum, baking ingredients, toppings, and beverages, under more than 80 brands. Some of its famous product lines include Hersheys, Kisses, Reeses, 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 sales from the U.S. domestic market. The firm is currently employing 14,000 people worldwide. Hersheys business model focuses on high volume and low margin. Majority of Hersheys customers are wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires and department stores. In the year of 2011, Hersheys sales to one of its largest customers McLane Company, Inc., accounted for 22.3% of Hersheys total net sales. McLane Company, Inc. is the primary distributor of Hersheys products to WalMart Stores, Inc.

II. Chart or table summary of Merits and Risks Risks

Relatively higher beta than competitors Increasing in prices of key product ingredients, such as cocoa, peanuts, milk, sugar, etc. Currency volatility of international operations Barrier to enter foreign markets Greater competition due to increased consolidation activities in the confectionary industry More long term debt than key competitors Difficulty of management control due to expansion into foreign markets Increased marketing expense Dependence on key suppliers and customers Dependence on domestic market

Merits
Higher return and Sharp Ratio than the industry average Hedging against currency volatility and commodity price increase Relatively low sales volatility compare to competitors Relatively high growth compare to competitors (see key ratio analysis) Strong customer relationships Powerful partnerships with suppliers High brand reputation High Involvement in the community

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Yi Yang, Pasquale Pacella. Financial Analyst Report

III. Industry Overview-The Candy Manufacturing Industry

The U.S. candy manufacturing industry has approximately 1,600 companies with combined annual revenue 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, Barry Callebaut, Cadbury (U.K. based, owned by U.S. company Kraft), Ferrero, and Meiji Holdings. Threat of new entrants Hershey has been a key player in the candy manufacturing Industry for more than 100 years. The threat of new entrants is low due to the existence of economies of scale. The Chocolate manufacturing industry requires large up-front capital investment. Consumers have established preference and trust for Hersheys products; therefore, switching to different products may be costly. In addition, new entrants will not have access to distribution channels. Finally, the new players need to go through the scrutiny of government regulations and inspections, which is also costly. Bargaining power of buyers The bargaining power of buyers (wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires and department stores) is relatively low due the existence of buyers switching costs. In addition, Hershey has already built its brand value among consumers. The general public recognizes and relied on its products. Bargaining power of suppliers The bargaining power of suppliers is medium to high since the suppliers are concentrated. The key ingredients for Hersheys products are milk, cocoa, peanut, and sugar. There are not many substitutes for these raw materials. The successful operation of Hershey largely depends on these suppliers. Threat of substitute products and services Hershey faces a high threat of substitute products and services due to several reasons. Firstly, Hershey specializes 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 snack manufacturing industries, such as Frito Lay. Finally, some retail industries can also compete with the candy manufacturers. For instance, candy especially chocolate is used as gifts during special holiday seasons. Hershey has to compete with flower stores, jewelry makers, and other retail stores (especially when people nowadays become more and more health conscious). Rivalry among competitors Although Hershey is one of the few candy makers that specialize in manufacturing chocolate, it still faces fierce competition with the big market players mentioned above. Some of these manufacturers not only manufacture 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, Hershey may 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 America's largest chocolate company. It has already established itself as a cultural icon for brand innovation.

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Yi Yang, Pasquale Pacella. Financial Analyst Report

IV. Detailed Company Analysis

The 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 economic crisis 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% was generated in the U.S. domestic market. The company has been trying to expand into new markets. In 2011, sales in foreign markets were up 10%. In the past three years, The Hershey Companys 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 of 09/28/2012, the company traded at 2.6 times its sales, 16.11 times the book value, 24.1 times its earning. These multiples were higher than most of Hersheys competitors. The Hershey Company has been paying dividend for six consecutive years. For the 12 months ending 7/1/2012, The Hershey Company paid $1.49 dividend per share, which was equavalent to a dividend yield 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. The gross profit margin is slightly higher in 2011 than 2010, in which the cost of goods sold totalled 54.7% of sales. In fact, the 2011 gross profit margin is the highest of the past five years. The earning before extraordinary items at The Hershey Company in 2011 totaled $628.96 million, or 10.3% of sales which is higher than the 9% in 2010. Since 2008, The Hershey Companys earnings before extraordinary items have increased by a total of 102%. However, the firms return on equity in 2011 (69.7%) was slightly lower than 2010 (70.8%). The companys inventory aggregated $648.95 million as of December 2011. With $3.29 billion cost of goods sold in 2011, the firm turned over its inventory 5.1 times in 2011. In other words, The Hershey Company had 72 days of inventory on hand. This number is higher than the 63 days of sales in inventory in 2010. In the year of 2011, The Hershey Company incurred $32.20 million expense for resarch and development, which is equivalent to 0.5% of its sales revenue. In 2010, the firms 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 was long term debt. The long term debt to equity ratio of the firm was 2.00. The accounts receibale in 2011 were $399.50 million, which is equivalent to 24 days of sales, an improvement compare to the 25 days of sales in 2010. On 7/26/2012, The Hershey Company updated its sales growth to 7%-9% for the fiscal year of 2012. It also changed its expected earnings per share growth to 12%-14%, compare to the previous estimate of 10%-12%. Given the disappointing results of Hersheys joint venture in India, Hershey Co. said it agreed to buy out the 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 Report clearing the decks for the American firm to compete on its own in a market dominated by rivals Kraft Foods Inc. and Nestle S.A, according to an article released by WSJ on September 10, 2012. The Hershey Company will buy the 43% stake in venture Godrej Hershey from Indias Godrej Industries Ltd. and another 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 ventures related manufacturing facilities, candy brands, and beverage brands. According to J.P Bilbrey, the president and chief executive at Hershey, since India is an important market, Hershey will make necessary investments in India to accelerate growth. For the fiscal year ended March 31, 2012, the venture had net sales of $69.73 million with losses of $13.37 million. However, The Hershey Company also expressed that it will not change the financial outlook provided by its second quarter earnings release. Overall, the company has been very confident about its further growth and expansion into new markets. Hersheys past financial statements indicate that commodities and packaging make up 60% of the companys cost of goods sold. The year of 2012 should proceed smoothly for The Hershey Company since 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 weather across western Africa caused by El Nino, cocoa production may not be able to satisfy the global demand in the future. The prices of sugar have been extremely volatile compare to other agricultural commodities.

V. Investment Risks Historical Return and Risk1

We discovered that HSY, has yield a stunning 19% compounded annual growth rate in 2007-2012 whereas 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 is widely recognized as an anti-cyclical business. The unsystematic risk is even lower than the systematic one 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 means that 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 is supported by an outstanding return. This means that a large portion of such relative risk is due to upside risk rather than downside risk.

Please refer to Appendix A

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Yi Yang, Pasquale Pacella. Financial Analyst Report

Hersheys Risk Factors2

As a candy manufacturer, The Hershey Company is exposed to the risks caused by volatile commodity prices. The company primary product ingredients include: cocoa, peanuts, milk and sugar. To explore the sensitivity of Hersheys stock prices, we ran a regression analysis3 on HSYs weekly stock returns using the following as independent variables: weekly stock returns of competitors (Kraft Foods, Nestle, Tyson Foods, Tootsie Roll Industries, Kelloggs), S&P500, cocoa, sugar, oil, and gold prices, as well as the option market volatility (VIX). We discovered that: HSYs stock returns have a statistically significant positive correlation with the volatility in financial markets, the interest rates, and some big market players such as Kraft and Tyson Foods. Surprisingly, the prices of cocoa, the main ingredient used in Hersheys products, do not have a statistically significant correlation with Hersheys stock returns. This is a sign that the company has effectively managed to hedge against rises in prices of cocoa using derivatives. However, the company disclosed that the prices of peanuts are difficult to hedge due to the lack of liquidity of the peanuts derivative market. The Hershey Company is currently holding manufacturing plants in Canada and Mexico. It generated 15% of sales revenue abroad in 2011. The firm is also trying to expand in China and India. Therefore, the company may face risks caused by volatilities of currency values. However, currency risk may not be a significant concern because the company disclosed that it has been using derivatives to hedge against it. Another risk of Hersheys foreign market expansion plan is the possibility that many of those foreign markets might have already been breached by Hersheys competitors. Finally the increased consolidation in the global confectionary arena (an example is Krafts acquisition of Cadbury) could lead to greater competitive pressure on HSY.

Assessing Default Risk Using Altman Z-Score4

The regular Z-Score for the food processing industry is 1.6. HSY has the highest Z-Score of 2.66, which far exceeds the industry average and the second-best company (Kelloggs Z-Score: 1.79).

Business Risk, Operating, and Financial Leverage5

HSY sales volatility, computed as the coefficient of variation of sales revenues in the past 10 years was lower than its competitors (0.126 vs. 0.149). Its 2011 operating leverage was 0.118 which is much lower than the industry average (0.665). Thus we can conclude that Hershey has a relatively low business risk. The firms financial leverage might seem to be a matter of concern (2.06 vs. the industry average of 0.98). However Hershey was also able to generate a cash flow that is 11.8 times higher than interests in 2011. In addition, the interest rate paid on debt are equal to 5.15% (5.62% is the average), so we think that the company is using the leverage wisely to elevate the return for stockholders equity.

2 3

Please refer to Appendix B Please refer to Appendix C 4 Altman Z-Score allows the estimation of a firms default risk. Please refer to Appendix D 5 Please refer to Appendix E

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Yi Yang, Pasquale Pacella. Financial Analyst Report

VI. Investment Merits

Hershey 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 its competitors. 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 operating margin at 17.35% compare to the industry average of 10.59%. The firms merits can be explored in great detail through the financial analysis below:

Financial Ratios Analysis6

The firms productivity of labor and capital is one of the highest in the candy industry. Each HSY worker generates $459,268 of sales versus the industry average of $357,734. It has an asset turnover of 2x. In addition, the fixed assets turnover ratio is also higher than the industry average (4.06x vs. 3.80x). Looking at profitability, Hersheys ROA, ROE, and ROIC are more than doubled the industry average. The firms 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 in turning sales and earnings into free cash flow. Giving a glance at FCF/Sales and FCF/Net Income, we deduce that for every $100 of sales only $3.84 was turned into cash while competitors are able to receive $7.01 for the same amount of sales. The firms liquidity does not worry us. Its quick ratio is far above 1x and quick ratio is roughly one. Both ratios 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 industry average. We think the candy manufacturer, with its superb return on shareholders equity, should have solid growth rates in the future.

VII. Valuation DCF Assumptions and Results7

We presumed the 1928-2011 geometric average return on stock8 as market return, the 1928-2011 geometric average return on T-bills as risk free rate. We adopted the beta computed by Value Line9. The cost of debt has been calculated by dividing the LT interest by the LT debt. We estimated that the cost of

6 Using Mondelez, General Mills, Kellogg, Nestle and Tootsie Roll as peers, please refer to Appendix F 7 See Appendix I for the DCF valuation 8 Please refer to http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html 9 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 to calculate the beta while VL did it with a broader stock index (maybe the Wilshire5000).

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Yi Yang, Pasquale Pacella. Financial Analyst Report capital 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 not successfully expand in China and India. For this reason we run a series of sensitivity 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 In calculating the terminal value, we assumed that HSYs operating margin equals to the 2011 industry average. To compute the sales growth, operating margin, CAPEX rates, and net working capital in the period of 2012-2017, we used a linear fading model11.
Cost of Equity Cost of Debt % Debt % Equity Tax Rate 7.5% 5% 11.1% 88.9% 35%

LBO Valuation Model12

We used the Leveraged Buyout Valuation to determine the minimum price WACC 6.83% for The Hershey Company. Our assumptions include: 1.4 as interest coverage ratio, 3.61% as the risk free rate, and 5.62% as the market risk premium. We got $26.94 as the floor price. Hershey Average Trailing P/E 23.65 18.64 Forward P/E 19.48 13.86 PEG Ratio 2.37 2.38 We used the following firms as comparables: Tootsie Roll, Nestle, Price/Sales 2.51 1.59 Campbell Soup, Heinz Foods, Danone, Kellogg, and General Mills. Price/Book 14.95 5.11 They are all US-based firms which operate in the food processing EV/Sales 2.74 1.86 industry. EV/EBITDA 12.56 11.05 It is possible that our selected comps may not effectively help us predict Hersheys performance. For instance, Nestle has a market capitalization of $210B while Tootsie Fair Prices Roll has a market cap of $1.57B. We think the presence the two firms may 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

Multiples Valuation

We ran a multiples valuation excluding Nestle and Tootsie Roll; Overall Avg. $ however, we got a target price of $44.60. Considering Hersheys Partial Avg. $ current market price ($70), and its growth opportunities, we think the target price of $44.60 is too low. Hence, we decided to include Nestle and Tootsie Roll.

EV/EBITDA

73.69 67.14 68.38

It worth say that it would have been better to include Kraft and Mars13 as comparables; however, we could not find any public information about both companies.

10

Morningstar claimed HSYs WACC to be 9%. Our result is not so different from that assumed by the firm, but we are sure about assumptions made by us. It is likely that Morningstar consider both/either higher market risk premium or lower risk free rate. 11 Please refer to Appendix G 12 Please refer to Appendix H 13 Mars is not publicly traded while Krafts key stats are not available on Yahoo Finance.

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Yi Yang, Pasquale Pacella. Financial Analyst Report We found that it is a common practice among investment firms to use P/E and EV/EBITDA ratios when dealing with food and beverage companies. We calculated an average of fair value prices obtained using P/E and EV/EBITDA. We got $64.42, which is below the $72.59-$71.79 fair price estimated by our DCF and FCFE analyses.

Free Cash Flow to Equity Valuation

We performed a FCFE Valuation using same assumption adopted for DCF analysis and we got almost the same result obtained through DCF valuation. The predicted fair price for HSY is $71.79.14

VIII. Recommendation
To sum up we have $70.16, $71.79, $68.68 as fair prices using DCF, FCFE and Multiple Valuation models respectively. The average is $70.21. We are confident to assume such figure as our target price. Hersheys stock price was $70.12 as of October 24th, 2012. It does not seem to be much upside potential for the stock. Therefore our recommendation is HOLD.15 Earlier in our DCF analysis we discovered that using a 3.5% pessimistic sales growth rate in the terminal value 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 $86.57

14 15

See FCFE Valuation Exhibit for more information. Were glad to see that we agree with other analysts 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.

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Appendix I DCF Valuation Exhibit

Sales Operating Expenses EBIT (Operating Profit) Taxes NOPAT Depreciation CapEx Change in NWC FCF Terminal Value Discounted FCF Present Value Plus Net Cash Minus Long-Term Debt Minus Other Liabilities Company Value Shares Outstanding Intrinsic Value Per Share 17654.25 567.30 1748.6 617.276 15855.67 226 $70.16 2011 $6,081 5,118 963 334 629 216 324 166 $354 2012 $6,550 5,513 1,037 360 677 232 349 179 $382 2013 $7,000 6,014 986 342 644 248 331 153 $408 $382 2014 $7,436 6,453 983 341 642 264 330 122 $454 $398 2015 $7,844 6,876 968 336 633 278 325 86 $500 $410 2016 $8,216 7,274 943 327 616 292 316 45 $546 $20,899 $16,465 Sales Fair Value Growth 3.0% $50.18 3.5% $58.67 4.0% $70.16 4.5% $86.57 5.0% $111.95 Terminal $8,545 7,639 906 314 592 303 303 0 $592

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Appendix II Multiples Valuation Exhibit

Hershey
Market Cap EV Trailing P/E Forward P/E PEG Ratio Price/Sales Price/Book EV/Sales EV/EBITDA 15.74 17.34 23.65 19.48 2.37 2.51 14.95 2.74 12.56

Tootsie Roll
1.57 1.51 34.73 N/A N/A 2.94 2.37 2.81 19.04

Nestle S.A.
209.09 224.27 19.93 16.6 3.37 2.25 3.49 2.43 13.04

Campbell Soup
11.03 13.51 14.6 13.08 2.92 1.42 12.16 1.75 9.09

H. J. Heinz
18.44 22.37 19.48 15.23 2.28 1.58 7.1 1.93 11.08

Tyson Foods Inc.

5.8 7.47 12.09 10.34 1.24 0.18 0.99 0.22 4.73

Danone
37.61 45.95 17.21 N/A N/A 1.43 2.33 1.78 10.31

Kellogg Company
18.51 26.52 15.75 14.41 2.36 1.39 8.59 2 11.41

General Mills
25.29 32.56 15.31 13.51 2.09 1.51 3.83 1.93 9.66

Average
40.91 46.77 18.63 13.86 2.37 1.58 5.10 1.85 11.04

EV/EBITDA Exhibit
Average EV/EBITDA EBITDA EV Debt Equity Value Shares Outstanding Fair Value $11.045 1565 17,285.425 631 16,654.425 226 $73.69

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Appendix III FCFE Valuation Exhibit

Sales per share from year just ended FY1-5 Sales Growth Rate Profit Margin Return on Equity FY1-5 Retention Rate FY1-5 Payout Rate FY1-5 Risk Free Rate for FY1-5 Beta FY1-5 Market Risk Premium FY1-5 Cost of Equity FY1-5 Sustainable Growth Rate Profit Margin Sustainable ROE Sustainable Retention Rate Sustainable Sustainable Payout Risk Free Rate (Sustainable) Beta (Sustainable) Risk Premium (Sustainable) Cost of Equity (Sustainable) 26.96 7.00% 22% 21% 55% 45% 2.50% 0.65 5.62% 6.15% PV of Cash Flow 4% 11% 20% 50% 50% 2.50% 0.65 5.62% 6.15% Value of Stock $ 71.79 $ 2.71 $ 2.74 $ 2.76 $ 2.78 $ 60.81 Terminal Value 78.18397 Dividend $ 2.88 $ 3.08 $ 3.30 $ 3.53 $ 3.78 $ 2.07 EPS $ 6.35 $ 6.79 $ 7.27 $ 7.77 $ 8.32 $ 4.15 Sales $ 28.85 $ 30.87 $ 33.03 $ 35.34 $ 37.81 $ 39.14

Year

FY12

FY13

FY14

FY15

FY16 Terminal

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Appendix A Historical Return and Risks

HSY
CAGR
16

SP500
3.14% 176.56 0.15 1.00 0.00 0.0001 0.15 0.00 176.64

KFT
10.80% 5.66 0.19 0.03 0.12 0.0115 23.53 0.75 4.92

NSRGY
11.42% 10.56 0.22 0.05 0.07 0.0070 13.14 1.14 9.45

TR
3.55% 2.14 0.09 0.01 0.08 0.0077 24.84 0.90 1.25

TSN
3.08% 3.68 0.24 0.02 0.04 0.0039 8.79 0.69 2.99

K
3.05% 4.90 0.10 0.02 0.03 0.0028 6.20 0.71 4.20

Ind. Avg.
7.72% 5.39 0.17 0.03 0.07 0.01 15.30 0.84 4.56

18.98% 12.49
17

St. Dev. Relative Risk Beta Sharpe Ratio Sortino Ratio Treynor Ratio Unsystem. Risk Systematic Risk

0.27 0.06 0.11 0.0118 24.01 2.46 10.08

16 17

Compounded annual growth rate calculated on the 2007-2012 period Measured as coefficient of variation of the price during 2007-2012 period

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Appendix B Risk Factors Regression Analysis18

Sensitivity to Risk Factors

1,2 1 0,8 0,6 Coefficients 0,4 0,2 0 -0,2 COCOA SUGAR VIX OIL GOLD BAR AGG SP500 KFT NSRGY TR TSN K

-0,4
-0,6 -0,8

Statistical significance of Risk Factors

8 6 4 2 t stat 0 COCOA SUGAR -2 VIX OIL GOLD BAR AGG SP500 KFT NSRGY TR TSN K

-4
-6 -8

18

See appendix C for the regression results

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Appendix C Regression Analysis

Regression Statistics Multiple R 0.9850 R Square 0.9703 Adjusted R Square 0.9686 Standard Error 2.2204 Observations 221 ANOVA df SS MS F Significance F Regression 12 33582.27193 2798.522661 567.6104229 1.1661E-151 Residual 208 1025.51449 4.930358126 Total 220 34607.78642

Coefficients Standard Error Intercept -64.86084091 11.25493151 COCOA 0.138334857 0.06022062 SUGAR -0.071810461 0.015971664 VIX 0.183869137 0.027572169 OIL -0.10674579 0.034507482 GOLD -0.021734356 0.011114303 BAR AGG 0.67915478 0.129388702 SP500 0.022579161 0.005082202 KFT 1.017281359 0.162311987 NSRGY 0.17160718 0.083849134 TR 0.040825074 0.158226927 TSN 0.341994503 0.108512357 K -0.524606468 0.089108239

t Stat -5.762881883 2.297134374 -4.496116545 6.668649757 -3.093409993 -1.955530233 5.24894963 4.442790839 6.267444419 2.04661839 0.258015973 3.151664118 -5.887294773

P-value 2.95227E-08 0.022606164 1.14904E-05 2.28494E-10 0.002250372 0.051859794 3.76355E-07 1.44239E-05 2.08126E-09 0.041953245 0.796649687 0.00186295 1.5562E-08

Lower 95% Upper 95% Lower 95.0% Upper 95.0% -87.04920298 -42.67247885 -87.04920298 -42.67247885 0.019613839 0.257055875 0.019613839 0.257055875 -0.103297552 -0.04032337 -0.103297552 -0.04032337 0.129512408 0.238225866 0.129512408 0.238225866 -0.174775036 -0.038716544 -0.174775036 -0.038716544 -0.043645479 0.000176767 -0.043645479 0.000176767 0.424073408 0.934236152 0.424073408 0.934236152 0.012559931 0.03259839 0.012559931 0.03259839 0.697293882 1.337268836 0.697293882 1.337268836 0.006304091 0.336910268 0.006304091 0.336910268 -0.271108973 0.352759122 -0.271108973 0.352759122 0.128069481 0.555919526 0.128069481 0.555919526 -0.700277538 -0.348935398 -0.700277538 -0.348935398

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Appendix D Altman Z-Score

HSY Working Capital/Total Assets Retained Earnings/Total Assets Equity Mkt Value/Total Assets EBIT/Total Assets Sales/Total Assets Altman Z-Score Safe, Grey or Distressed Zone? MDLZ GIS K NSRGY TR Average 0.05 0.04 0.11 0.39 0.88 1.60 Grey 0.20 -0.02 -0.01 -0.02 0.07 0.02 0.04 0.05 0.24 0.07 0.13 0.17 0.20 0.37 0.33 0.15 1.40 0.57 0.84 1.11 2.66 1.02 1.51 1.79 Safe Distressed Grey Grey -0.02 0.18 0.03 0.04 0.00 0.07 0.52 0.78 0.74 0.62 1.07 1.57 Grey Grey

Appendix E Business Risk, Operating and Financial Leverage

Financials Financial Leverage Debt/Equity Interest coverage ratio Return on debt % Business Risk CV(Sales)19 Operating Leverage20

HSY 5.2 2.06 11.8 5.15 0.126 0.118

MDLZ 2.66 0.66

GIS 3.29 0.96 7.6 6.00 0.157 0.404

K 6.76 2.86 6.7 5.41 0.159 0.688

NSRGY 2.01 0.11 23.5 7.08 0.109 0.239

TR 1.29 0.01 4.00 0.109 0.923

Average 3.20 0.92 12.6 5.62 0.149 0.665

0.211 1.070

19 20

CV stands for coefficient of variation. Computed as 10 years average of the ratio between the change of the EBIT out of the change of the sales.

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Appendix F Financial Ratios Analysis21

Financials Efficiency Revenue per Employee Asset Turnover (Average) Fixed Assets Turnover Profitability Return on Assets % Return on Equity % Return on Invested Capital % Free Cash Flow/Sales % Free Cash Flow/Net Income Liquidity Current Ratio Quick Ratio Growth Opportunities Cap Ex as a % of Sales Payout Ratio % Sustainable Growth Rate Historical Sales Growth 3-Year Average 5-Year Average 10-Year Average HSY MDLZ GIS K NSRGY TR Average

$459,268 $430,897 $481,751 $431,303 $290,516 $244,204 $375,734 1.4 0.57 0.84 1.11 0.74 0.62 0.776 4.06 3.94 4.76 4.12 3.68 2.49 3.798

14.48 71.83 23.01 3.84 0.37

3.73 9.93 5.57 5.06 0.78

7.88 24.51 11.57 10.36 1.1

10.37 62.84 15.53 7.58 0.81

8.41 15.99 11.78 5.66 0.5

5.11 6.58 6.51 6.39 0.77

7.1 23.97 10.192 7.01 0.792

1.74 0.93

0.88 0.45

0.96 0.47

0.91 0.5

0.95 0.66

3.64 2.31

1.468 0.878

5.72 50.4 36.2

3.26 58.3 5.79

4.06 51.9 12.72

4.5 49.4 31.04

6.01 61.1 9.77

3.07 31.6 2.08

4.18 50.46 12.10

5.81 4.23 2.93

9.04 9.61 4.84

4.28 6.01 7.68

0.97 3.89 4.07

-8.7 -3.21 -0.13

2.39 1.43 2.32

1.596 3.546 3.756

21

2011 Data obtained through Mergent Online

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Appendix G DCF Assumptions

Actual 2011 15.83% 34.68% 5.33% 3.55% 2.74% Assumed using a linear fading model Assumed 2012 2013 2014 2015 2016 TV 7.72% 6.97% 6.23% 5.49% 4.74% 4.00% 14.96% 14.09% 13.22% 12.34% 11.47% 10.60% 34.68% 34.68% 34.68% 34.68% 34.68% 34.68% 5.03% 4.73% 4.44% 4.14% 3.85% 3.55% 3.55% 3.55% 3.55% 3.55% 3.55% 3.55% 2.74% 2.19% 1.64% 1.09% 0.55% 0.00%

Appendix H Simple LBO Valuation Model

Simple LBO Valuation Model EBIT Interest Coverage Ratio Interest Risk Premium Treasury Bonds Enterprise Value Total Price we can pay Target Debt Amount Total Excess Cash After Paying off debt Use Excess Cash Shares Outstanding Price Per Share 962,845,000.00 1.4 687,746,428.57 5.62% 3.61% 7,451,207,243.46 9,314,009,054.33 1,993,100,000 567,300,000 5,458,107,243.46 6,025,407,243.46 223,654,520.00 26.94

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