Is The Hershey Company (NYSE:HSY) A Sell At Its Current PE Ratio?

HSY is currently trading at a reasonable trailing PE of 19.78x, which isn’t too different to the 19.58x average multiple of the Food. But should this fair multiple be the final verdict of HSY’s fair valuation? No. This is because multiples like PE tend to overlook key company-specific factors such as future growth and capital structure. To resolve this problem, I’ll identify some important factors to consider when judging the relative valuation of HSY. Let’s dive in.

Is HSY making any money?

The PE multiple is useful for when a company is profitable, which is the case with HSY. This is because using PE to value an unprofitable business is flawed since the company has negative earnings (this will create a negative ratio). For these companies, it is possible to compare price to other fundamentals like sales or book value where applicable. In the past, HSY has always maintained its profitability. As earnings forecasts indicate the positive trend will continue, the PE multiple can be an acceptable tool to assess the HSY’s value, however, there may be a better option.

NYSE:HSY Future Profit June 27th 18
NYSE:HSY Future Profit June 27th 18

Is HSY in a lot of debt?

HSY has US$4.61b in debt funding to operate business. This represents more than double the amount of equity in the business! Although debt can be a cheaper source of capital, it also brings with it some risks around debt obligations and bankruptcy. Though this is an unlikely scenario for a US$19.71b company.

NYSE:HSY Historical Debt June 27th 18
NYSE:HSY Historical Debt June 27th 18
You may be wondering how debt impacts an equity valuation. Well, the company’s share price theoretically represents the value of its equity portion only. However, it’s crucial to account for debt as well, since debt also contributes to the company’s earnings capacity and risk. The EV/EBITDA multiple, which uses EV as a substitute for share price, allows us to incorporate debt into our valuation.

HSY’s EV/EBITDA = US$23.86b / US$0 = 12.64x

Comparing HSY’s multiple to the 12.64x for the industry suggests the company is fairly valued, as was suggested previously by the price-to-earnings multiple.

Does HSY have a fast-growing outlook?

According to consensus estimates, earnings are expected to compound at 6.20% every year for the next 5 years. This gives HSY a robust growth trajectory for the future. However, current earnings don’t reflect any of this potential growth, which is a limitation for using past (or “trailing”) values of EBITDA. You should pay for what you’re going to get, not what’s already happened. To account for this growth we can use the one-year analyst-consensus future EBITDA (this is a “forward” multiple).

HSY’s forward EV/EBITDA = US$23.86b /US$1.90b = 12.59x

The 10.76x average multiple for the industry suggests that HSY is overvalued relative to its peers. which differs from the fair market value HSY’s past EV/EBITDA ratio suggested.

Next Steps:

Basing your investment decision based on relative valuation metrics alone is certainly no sufficient. There are many important factors I have not taken into account in this article. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
  2. Past Track Record: Has been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of ‘s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.