Hershey's Breakout: Analysing ROCE, Net Margin, and EPS Performance
Joe Wong, Dealer | Contract for Differences
Joe Wong is a seasoned investor with over 15 years of experience in both the financial markets and entrepreneurial ventures. A Macquarie University alumnus with a Bachelor’s degree in Applied Finance from Australia, Joe is a staunch advocate in the Value Investing approach.
His portfolio management strategy focuses on identifying undervalued companies with strong fundamentals. This disciplined approach has consistently yielded double-digit returns on his own portfolio. Despite his investment track record, Joe maintains a strong appetite for knowledge and remains an avid reader.
Chua Minghan (CFA), Deputy Head | HQ Dealing Team
Chua Minghan graduated from the National University of Singapore with a Bachelor’s degree in Economics. He is passionate about education and went on to get a post-grad Diploma in teaching. His vision is to educate clients to make informed decisions for their trading and investments.
Minghan enjoys learning fundamental analysis, technical analysis, and strives to use data analysis to improve his trading skills.
Hershey’s recent stock performance has captured the attention of investors and analysts alike. But what lies beneath these fluctuations? In this article, we dive deeper than mere price movements to uncover the fundamental forces driving Hershey’s impressive market presence.
Based on technical analysis, Hershey’s share price bottomed at US$181.00 on 21 June 2024 and peaked at US$200.00 on 5 August 2024, delivering a return of 9.5% in just 45 days. Can it climb above the US$200 price range? To help us answer this question, let’s utilise fundamental analysis to decipher the reasons why we think this is a possibility.
Understanding the core financial metrics of leading companies such as Hershey’s offers invaluable insights into their operational success and investment potential. Among these metrics, Return on Capital Employed (ROCE), Net Margin, and Earnings Per Share (EPS) stand out as critical indicators of corporate health and profitability. Analysing these figures not only sheds light on Hershey’s financial status but also benchmarks its performance in the consumer staples industry.
This article delves into the intricacies of Hershey’s financial performance, focusing on its (1) ROCE to gage the efficiency of capital utilisation, (2) it’s 5 year historical Net Operating Margins to understand its “Earnings Power” , and (3) the 5 Year historical growth of its earnings per share as a reflection of its profitability to shareholders. By breaking down these complex financial metrics, our aim is to provide a comprehensive overview of Hershey’s operational success and forecast its trajectory in the competitive landscape, offering actionable insights for investors.
Decoding Hershey’s ROCE - Key Financial Metric
What is ROCE?
Return on Capital Employed (ROCE) is a vital financial metric that measures how effectively a company generates profits from its capital. Specifically, ROCE is calculated by dividing Earnings Before Interest and Tax (EBIT) by Capital Employed, which is the total assets minus current liabilities. This metric is particularly useful for comparing the performance of companies in capital-intensive sectors as it includes long-term debt, providing a clear picture of profitability that neutralises the impact of financing structures.
Performance Highlights
Japan’s economy and the interventions by the BOJ have often served as a reference point for major Central Banks globally when considering monetary policies to address economic downturns. Although Japan was not the first major economy to impose negative rates on deposits held by commercial banks, it was the first economy to sustain such a policy for an unprecedented eight years – a groundbreaking move in the history of central bank policy. However, even with a prolonged period of negative to zero interest rates, Japan’s economy failed to significantly boost domestic demand. Additionally, this policy has exerted downward pressure on Japan’s currency, especially as other nations like US had raised interest rates to combat inflation [14].
Source: Yahoo Finance
Hershey’s annualised ROCE for the quarter ending in March 2024 stood at an impressive 31.5%. This figure is significantly higher than the average ROCE of -0.6% reported for the Consumer Staples sector, positioning Hershey in the 94.6th percentile among its peers over the past five years. Hershey has not only maintained a robust ROCE but has also increased capital employed by 63%, indicating a strong reinvestment strategy that continues to yield high returns.
Competitor Performance Analysis
Source: AlphaSpread
When compared to its competitors, Hershey’s ROCE is outstanding. For instance, companies like Nestle and Mondelez International reported ROCEs of 17% and 13% respectively. Hershey’s ROCE of 31.5% far surpasses other major players in the industry such as Danone and Kraft Heinz, which reported ROCEs of 11% and 6% respectively. This demonstrates Hershey’s ability to utilise its capital effectively to generate profit, distinguishing it as a leader in the confectionery industry.
Net Margin - Hershey’s Profit Efficiency
Understanding Net Margin
Net margin, calculated as net income divided by revenue, serves as a critical measure of profitability. Hershey’s net margin for the quarter ending in March 2024 was an impressive 24.52%. It has also demonstrated consistent profitability since 2018, maintaining mid-double-digit margins.
Source: TradingView
This sustained performance positions the company in a notably defensive stance relative to the industry, which typically operates within a net margin range of 8% to 15%.
Benchmarking Against Competitors
Source: GuruFocus
Source: TradingView
Hershey’s net margin significantly outperforms its industry peers. The trailing twelve months (TTM) net profit margin stands at 18.13%, compared to the sector average of 8.7%. This superior net profit margin highlights Hershey’s efficiency in generating profit and retaining earnings compared to its competitors, underlining its strong position in the confectionery industry.
Earnings Per Share (EPS) Trends
EPS Explained
Earnings Per Share (EPS) is a direct reflection of a company’s profitability and financial health, calculated as net income divided by the number of outstanding shares. Hershey’s reported EPS figures, both GAAP and non-GAAP, provide a nuanced understanding of its financial outcomes, accounting for various adjustments like derivative mark-to-market losses, business realignment activities, and acquisition-related activities.
Hershey’s EPS Over Time
Source: TradingView
Hershey’s trajectory in EPS growth is impressive, demonstrating a consistent upward trend.
From 2010 to 2023, Hershey’s annual EPS increased from US$2.21 to a robust US$9.06, marking a 22.57% increase year-over-year. This increase is thanks to the company’s strategy of its continuous development on its Enterprise Resource Planning (ERP) software, which is expected to optimise operations, leading to further margin expansion.
Comparison with Industry Leaders
Source: EPSTrendScore
Hershey’s stands out not only in absolute numbers but also when compared against its peers in the industry. Hershey’s EPS trend score of 100.0% is unparalleled, significantly outperforming competitors like The Hain Celestial Group and JM Smucker Company, which scored 25.0% each.
Even major players like Mondelez International and General Mills scored lower, at 50.0% and 37.5% respectively. This exemplary performance underscores Hershey’s superior management and operational efficiency, making it a benchmark for success in the confectionery and broader consumer staples sector.
Conclusion
Through an in-depth analysis of Hershey’s core financial metrics, including ROCE, Net Margin, and EPS, this article has highlighted the company’s operational prowess and its standout position within the competitive landscape of the confectionary industry.
The figures speak volumes, showcasing Hershey’s exceptional ability to utilise capital efficiently, generate substantial profits from its revenue, and continuously deliver value to its shareholders. Hershey’s commitment to maintaining solid financial performance not only exemplifies its superior management strategies but also highlights its potential for sustained earnings growth amidst fluctuating market conditions.
Based on a 10-year median Price Earnings Multiple of 26x with an estimated forward Earnings per share of US$10.09, the intrinsic value I estimated for Hershey’s is currently US$234, presenting an upside of 14% from its current share price. For those keen on deepening their understanding of how we expect the US Market to perform in the next half of 2024, do watch our webinar here. It promises deeper insights into forging sustainable paths in the challenging terrain of the US Market.
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References
[1] – https://www.gurufocus.com/term/roce/HSY
[2] – https://finbox.com/NYSE:HSY/explorer/roce/
[3] – https://finance.yahoo.com/news/look-hersheys-nyse-hsy-impressive-110100394.html
[4] – https://www.alphaspread.com/security/nyse/hsy/profitability/ratio/return-on-capital-employed
[5] – https://www.gurufocus.com/term/netmargin/HSY
[6] – https://investors.thehersheycompany.com/content/hershey-corporate/en-us/home/newsroom/press-release/press-release-detail.html?122773
[7] – https://www.zacks.com/stock/research/HSY/industry-comparison
[8] – https://www.thehersheycompany.com/content/hershey-corporate/en-us/home/newsroom/press-release/press-release-detail.html?122773
[9] – https://www.macrotrends.net/stocks/charts/HSY/hershey/eps-earnings-per-share-diluted
[10] – https://finbox.com/NYSE:HSY/explorer/eps_trend_score/
[11] – https://tradingview.com
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