The$Hershey$Company$

NYSE:&HSY

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Table&of&Contents&
Executive$Summary$.............................................................................................................................$4& Introduction$...........................................................................................................................................$4& The$Hershey$Company$........................................................................................................................$5& Equity$Perspective$ ................................................................................................................................$6& Financial$Reporting$Objectives$........................................................................................................$6& Global$Chocolate$Industry$(Present$and$Future)$.......................................................................$7& Hersheys$Specific$Analysis$...............................................................................................................$9& Project$Next$Century$......................................................................................................................................$9& Global$Supply$Chain$Transformation$Program$..................................................................................$ 10& Managing$Revolving$Consumer$Dynamics$and$Regulatory$Standards$.......................................$ 10& Expansion$program$in$emerging$economies$.......................................................................................$ 10& Strategy$for$expansion$................................................................................................................................$ 11& Brookside$Foods$Ltd.$(Brookside)$Acquisition$...............................................................................$ 12& McLane$Company$Inc.$$Hersheys$Biggest$Customer$.......................................................................$ 12& Voting$model$&$Milton$Hershey$School$.................................................................................................$ 12& SWOT$Conclusion$..........................................................................................................................................$ 13& Commodities$$Price$Risk$Management$and$Futures$Contracts$......................................$13& Introduction$to$Cocoa$.......................................................................................................................$13& Supply$...............................................................................................................................................................$ 14& Current$Price$..................................................................................................................................................$ 14& Future$Price$Predictions$and$Anticipated$Effect$on$Hersheys$.....................................................$ 15& Forwards$and$Hedging$Strategy$ ...............................................................................................................$ 15& Financial$Statement$Analysis$of$Hersheys$...............................................................................$16& Recasting$of$Financial$Statements$..........................................................................................................$ 16& Normal$Scenario$............................................................................................................................................$ 16& Income&Statement&........................................................................................................................................................&17& Balance&Sheet&.................................................................................................................................................................&17& Worst$Scenario$ ...............................................................................................................................................$ 18& Income&Statement&and&Balance&Sheet&.................................................................................................................&18& Revenue&Recognition&..................................................................................................................................................&19& Financial$Analysis$..............................................................................................................................$19& Profitability$.....................................................................................................................................................$ 20& Balance&Sheet&.................................................................................................................................................................&22& Comparison$of$Hershey$financial$performance$with$Industry$and$Global$Players:$...............$ 23& Financial$Forecast$.........................................................................................................................................$ 25& Assumptions&...................................................................................................................................................................&25& Future&Outlook&..............................................................................................................................................................&27& Sensitivity&Analysis&.....................................................................................................................................................&28& Conclusion$............................................................................................................................................$29& Exhibit$1:$..........................................................................................................................................................$ 30& Exhibit$2:$..........................................................................................................................................................$ 30& Exhibit$3:$..........................................................................................................................................................$ 31&
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Exhibit$6:$(Normal$Scenario)$ .....................................................................................................................$ 33& Exhibit$7$(Worst$Case$Scenario)$..............................................................................................................$ 34& Exhibit$8:$..........................................................................................................................................................$ 35& Exhibit$9:$..........................................................................................................................................................$ 36&

Executive Summary
This report will show that Hersheys embodies operational excellence demonstrated by their industry leading gross margins; this competitive advantage allows Hershey to thrive in the chocolate industry. Their long history points to reporting objectives that emphasize stable growth, thus when reading their financial statements we must beware of possible income smoothing and other creative accounting policies. Hershey uses financial instruments to hedge itself against commodity and currency fluctuations. Their continued investments in supply chain efficiency have made them a major force in the US chocolate industry, and their expansion into international markets provides growth opportunities for the future. Through our recasting of the financial statements we have determined that even in the worst-case scenario, Hersheys business operations are sustainable and they will remain the industry leader in gross margins. Although, at a first glance a P/E of almost 30 might seem high for a consumer staple company, investors believe in the future growth of the chocolate industry, which is demonstrated by the high P/E of Hersheys competitors. Looking at the forecast for the future it becomes clear that from an equity perspective Hershey is a sound investment and should provide stock growth in the future. We estimate Hersheys share price to be $101.89 by the end of 2013. However, do to the sensitivity of the model to the cost of sales and P/E, which are difficult to predict, we expand our confidence interval to $90.98 to $113.34 by the end of 2013, in all cases a significant improvement over Hersheys current share price of $86.61.

Introduction
From dark chocolate to milk chocolate to white chocolate, this sweet treat powers what looks to be an ever growing market, virtually unhindered by recent economic downturns. As a true indulgence, chocolate appeals to a wide range of consumers creating an ever-thriving industry. With this in mind, we have selected The Hershey Company (Hersheys) for our project.

The Hershey Company

The Hershey Company was incorporated in 1927 as a successor to a business founded by Milton S. Hershey in 1894. Hersheys is the largest chocolate producer in North America and a global leader in chocolate and confectionery products. Hersheys principal product groups include chocolate and sugar confectionery products; pantry items (such as baking ingredients, toppings and beverages); and gum and mint refreshment products. The company operates as a single reportable segment in manufacturing, marketing, selling and distributing its products under more than 80 brand names including some of well-know brands such as Reeses, Jolly Rancher, Kit Kat, Rolo and Twizzlers. Its three operating segments are broken up geographically into the United States, the Americas (Canada, Mexico, Brazil, Central and South America, Puerto Rico) and Asia, Europe, the Middle East and Africa (AEMEA). Hersheys products are marketed and sold in approximately 70 countries worldwide. By far, the largest revenue-earning segment is the United States, accounting for 84% of sales. The AEMEA operations represent less than 10% of consolidated revenues but are growing quickly, especially in India, the fastest growing chocolate consuming country in the world (with annual growth averaging 15% from 2008 to 2012). The Hershey Experience arm of the company manages the company's retail operations globally, including Hersheys Chocolate World Stores in Hershey (Pennsylvania), New York City, San Francisco, Chicago, Shanghai, Niagara Falls, Dubai, and Singapore. Hersheys two strategic business units are the chocolate business unit and the sweets and refreshment business unit. These strategic business units focus on various components of the company's product line and are responsible for building and leveraging the companys global brands, and putting best demonstrated practices around the world into place.

Equity Perspective
The Hershey Company uses debt financing to lower its overall cost of capital and, in turn, increase the return on stockholders equity. The Hershey Company has current cash reserves of $728 million, up from $694 million at the end of the previous year. In October 2011, the company entered into a five-year agreement for an unsecured revolving credit facility to borrow up to $1.1 billion, with an option to increase borrowings by an additional $400 million with lender consent. As of December 31, 2012, the entire $1.1 billion still remained available to borrow under the agreement. In addition to this revolving credit facility, the company maintains lines of credit with many domestic and international commercial banks. As of December 31, 2012, the company had the ability to borrow up to $177 million (in various currencies) under the lines of credit. Due to the large cash reserve and the current level of borrowing available to the company, we do not anticipate them requiring additional debt financing in the near to mid-term. Therefore, when analyzing the Hershey Company, we will be taking the perspective of an equity investor, which is a much more interesting and, in this case, realistic perspective to take.

Financial Reporting Objectives

The Hershey Company was founded in 1894 and is one of the oldest chocolate companies in the United States. It is a company built upon consistent long-term growth, only really experiencing poor shareholder performance in line with greater macroeconomic downturns (see Exhibit 1). The company has been paying a stable and growing dividend to its shareholders for over 25 years (see Exhibit 2). HSY seeks to maintain consistency in its reporting, in terms of continued earnings and dividend growth, as well as meeting its stated targets. Wild swings in earnings and stock price are not consistent with Hersheys public image. This objective (and possible related earnings management practices such as income smoothing

and reporting practices that allow for results in line with or better than predicted targets) will be kept in mind throughout the analysis and report.

Global Chocolate Industry (Present and Future)

The global chocolate industry has been growing moderately for last five years. While the worldwide estimated growth in CAGR is 2.7%, in Asia CAGR is expected to grow at 4.3%.1 In emerging economies such as China and India, chocolate has started to be used as a functional food, which presents a great opportunity for global chocolate companies. In 2011, BRIC countries accounted for 55% of global confectionery retail growth. According to Hersheys investor update, 2012, BRIC countries will represent $26 billion in sales (out of estimated global sales of $98.3 billion2) by 2017. According to government officials and KPMGs report, the fastest growing chocolate countries are India (15%), China (9%), Russia (6%) and Mexico (3.8%). Hersheys says by 2017, 25% of its sales revenue will come from international sales3. Growing segments among chocolates are organic chocolate and fair-trade chocolates.4 While chocolate buying is seen primarily as an impulse purchase, KPMGs report states there are 3 distinct types of chocolate purchasers. Convenience buyers are those who want to grab a chocolate bar from a local store or throw a multi-pack into a trolley during a weekly shopping trip. Thus, chocolate in bar form became quite important and global companies like Mars innovated in areas of packaging and marketing to attract consumers. Value buyers are especially important in emerging economies. Luxury buyers are a niche segment of the market and companies like Godiva and Lindt are prominent players in this market. According to US chocolate sales numbers, luxury chocolate sales are up, year-over-year. The sensitivity of these buyers to price is difficult to determine, however seeing as how Hershey has increased their prices by nearly 10% in recent years. Last year the increase in volume accounted for only a 0.3% increase in net sales (outside of the Brookside acquisition) indicating that consumers may in fact be sensitive to price and Hersheys strategy of increasing prices may not be sustainable,

especially in times when cocoa prices are low, and thus the price increases are not justifiable to customers. There are 4 main pillars driving current and projected future growth in the global chocolate industry: Sustainability, Innovation, Health and Events. Sustainability is having a major impact on the chocolate industry, particularly the US market, which is the largest chocolate market in the world. Consumers are becoming increasingly aware of fair trade programs. Hersheys recently announced that, for its Bliss brand chocolates, it will import cocoa specifically using a fair trade program. Innovation in packaging is next big trend in chocolate. Many of Hersheys competitors, such as Nestle and Wrigleys, have recently introduced new, custom packaging. Thus, in order to accurately predict Hersheys future cash flows, it is important to consider possible capital expenditure in innovation and packaging, as well as possible new machinery to produce customized products. Health is becoming an increasingly important area of focus, even in the chocolate industry. Obesity is driving many governments, like that of the UK, to introduce new regulation for food and chocolate companies. Hersheys must consider increased regulation and the wider focus on health if it is to succeed in continued future growth. Events is the final pillar and plays an important role in chocolate sales. In the United States, Easter season chocolate sales were $4.9 billion in 2010. Easter is equally big business in Brazil, where chocolate sales see annual highs around this time of year. In China, more than half of the chocolate purchased is done so as gifts, with New Year and Lunar New Year being peak buying times. Product innovation and additional marketing campaigns by Hersheys competitors during these peak seasonal selling times could have a significant adverse on Hersheys sales volume. Finally, it is worthwhile to note that the youth population (in almost every country in which Hersheys operates) has a huge effect on the future of chocolate sales. For example, although Japan is now the worlds 3rd largest chocolate market, its aging population makes the growth prospects for chocolate less attractive than a country such as Mexico. In Mexico, 52% of 8

the population is under age of 20, which presents a huge opportunity for global companies to expand and attract new, younger customers to drive future growth. With the above analysis in mind, looking to the future of chocolate industry, we expect that Hersheys business will be significantly affected (both negative and positively) by a wide variety of factors. Innovative packaging, health benefits, youth population, personalized orders, distribution channels, rising of the middle class and input prices are going to significantly affect the chocolate industry, and Hersheys success largely depends heavily on how they adapt to those market changes. As well, with increased opportunity comes increased risk. The global chocolate industry is facing two major threats currently. Counterfeit products are a major threat to global chocolate companies. Other companies are making low quality products and imitating the packaging of companies such as Hersheys, in order to mislead consumers and garner sales, this may become more of a factor if the price of Hersheys product continues to increase. The Obesity Epidemic is another major concern for chocolate companies and, as discussed, many governments are in the process of implementing rules and regulations to overcome it, including stricter regulation on the sale of products containing an excessive amount of sugar.

Hersheys Specific Analysis

Now that we have discussed the global chocolate industry as a whole, we will look at Hersheys, specifically, and discuss a few programs/initiatives that Hersheys is implementing and will have a significant effect on the company, moving forward.

Project Next Century

In 2010, Hersheys announced Project Next Century in order to create operating efficiencies and a more competitive cost structure. The company believes that shifting significant company production to the West Hershey facility will give them significant

advantages for in their supply chain. They estimate they need to spend somewhere between $190 million and $200 million for the project. As part of this project, Hersheys projects they will be able to save $60 million to $80 million per year, moving forward, which will enable them to further re-invest in brand building and global capability increases.5 The project was completed in 2012 within the cost estimates.

Global Supply Chain Transformation Program

In 2009, Hersheys finished a 3-year long Global Supply Chain Transformation Program. This was a well-planned and accurately timed project that increased efficiencies in Hersheys operations and helped them in their pursuit of international expansion. Through this program, the company introduced an advanced inventory management system, improved consumer relations and reduced overall cost structure. As part of this program, they also opened a new manufacturing facility at Monterrey, Mexico to support the booming market in Latin America, including Brazil and Mexico6.

Managing Revolving Consumer Dynamics and Regulatory Standards

In the previous section, we discussed about the changing market dynamics and evolving regulatory standards that are driving global chocolate industry. Hersheys has responded to those changes. For example, to attract the value buyers, Hersheys introduced KitKat Mini version. To attract the Luxury Buyers, Hersheys introduced Hersheys Premium first in Brazil and then launched the product worldwide7. To combat with the obesity challenge, Hersheys introduced new Sugar Free product line. Those products are moderately lower in calories (by about 20%) though similar in fat content, i.e. richness in test to the original versions.

Expansion program in emerging economies

As discussed in the Global Chocolate Industry section, emerging economies, such as BRIC countries, provide significant opportunities for Hersheys to expand. Keeping up with the

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pace of these economies, Hersheys is expanding in these markets via Greenfield Projects, exports and acquisitions. In countries like Brazil, Hersheys started its own manufacturing facility, whereas in other regions like Central America and Puerto Rico, it mainly sells product it has exported from the United States. For Hersheys, the majority of its sales volume (84.5%) still comes from US, so there is tremendous opportunity for the company to expand into these new markets. On the flip side, the margin will not be as high as the US market in those emerging economies (where the price of chocolate and other confectionary goods is far lower), so Hersheys will need to make its money from bigger sales volume and innovation in new products. Hersheys is now expanding in Europe using a new strategy. It is initially expanding with wellknown brands: Kisses, Reese's, Hershey Ice Breakers and Jolly Rancher8. Hersheys states that it will be able to meet the increasing sales volume through its improved production facility in West Hershey (Project Next Century) and a new production facility in Brazil. Hence, we expect in short-run Hersheys need not to make any acquisition to support its international growth.

Strategy for expansion

Hersheys seems to have a very well thought out strategy for expansion into emerging economies. In Mexico, they started with Greenfield Operations because they had existing product/market knowledge in Latin America. But for other countries like India and China this was not the case. In India and Brazil they bought a 51% stake in Godrej Beverages & Foods Limited and Pandurata Netherlands B.V., respectively. Once they learned about operating in India and saw huge potential, they then acquired the remaining 49% of the company. As well, in China, they entered into an agreement with Lotte Confectionary Ltd. to produce and market Hersheys products. This shows that Hersheys is extremely strategic in its decision-making and completes significant and tested due diligence before implementing any strategy, which can only serve to benefit shareholders moving forward. Since Michele Buck was appointed as the Chief Growth Strategy Officer of Hersheys, she has invested more money (up from 2% to 8%) in advertising

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campaigns and customer insights research programs. Hersheys is already seeing a significant return on those investments.

Brookside Foods Ltd. (Brookside) Acquisition

Hersheys has traditionally been looking to acquire companies that have complementary skills, facilities and products. In 2012, they acquired all of the outstanding stock of Brookside Foods Ltd., a privately held confectionary company based in British Columbia, Canada. Brookside was doing approximately $90 million in annual revenue prior to the acquisition. By acquiring Brookside, Hersheys was able to expand its product offering to include chocolatecovered fruit and real fruit juice in its portfolio. Hersheys also acquired two production facilities located in British Columbia and Quebec as part of the acquisition.

McLane Company Inc. Hersheys Biggest Customer

Hersheys biggest customer by a significant margin (accounting for 22.2% of Hersheys revenue) is McLane Company Inc. (McLane). If McLane does not renew its contract once the current deal expires, this will have a significant adverse affect on Hersheys sales volume. We see this as unlikely due to the long-standing relationship. As well, because McLane is the companys biggest consumer, it makes up the majority of Hersheys accounts receivable. If McLane encounters cash flow problems Hersheys the quality and days to collect of Hersheys accounts receivables will suffer. It should be noted that McLane is wholly owned subsidy of Berkshire Hathaway, and it is itself a $28 billion and highly successful supply chain company.

Voting model & Milton Hershey School

The companys largest shareholder is the Hershey Trust Company, resulting in a dual class capital structure with unequal voting rights. Hersheys Class B stockholders (which include the Hershey Trust Company) have 10 times more voting power than the common stockholders. Furthermore, the common stockholders are only entitled to select one out of the six members on

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the Board Of Directors. Milton Hershey School, the school founded by Milton Hershey, has three members on the Board Of Directors of the company, including the Chairman of the Board. Inherent with this type of capital structure, there is often a greater opportunity for corruption, unfair Board of Director practices and the potential for earnings management/creative accounting to occur without proper oversight.

SWOT Conclusion
In conclusion, by looking first at the global chocolate industry and then at Hersheys specifically, we believe that Hersheys has significant strengths in areas such as successful investment in efficiency improvement programs, well thought out expansion into new product lines and growing markets (often through acquisition) and solid recognition of emerging trends such as the health conscious consumer. Their major weakness currently is the companys limited presence outside US. Clearly, major opportunity for Hersheys lies in expansion into emerging economies and the huge potential offered there. It also has the opportunity to further diversify its product portfolio and expand its presence in other segments of the confectionary business. A threat to Hersheys continued success lies in the global chocolate industry threats (such as the obesity epidemic, certain aging populations, etc.) as well as strong competition from other global chocolate players like Mars, Russell Stover and Nestle. In the premium chocolate segment, the company also faces competitive threats from companies like Lindt, Godiva, Ferrero Rocher, etc. Mars has a very strong portfolio of chocolate brands in Europe and Nestle has a strong presence worldwide. Hersheys strong focus on innovation, smart expansion and its recent increase in marketing effort, lends to the conclusion that the company will be extremely successful in the international marketplace, moving forward.

Commodities Price Risk Management and Futures Contracts Introduction to Cocoa

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As a company thats main products are largely chocolate based, cocoa is, by far, the most significant raw material used by Hersheys and will be examined the most thoroughly in this report. Taking a look into the prices and supply of cocoa beans is crucial, as this will have a direct impact on the companys COGS and, thus, bottom line. Less significant inputs such as sugar, milk and peanuts will not be discussed in detail in this report, as they are simply far less relevant to Hersheys bottom line.

Supply
Hersheys cocoa products are purchased directly from third-party suppliers, who mainly source the cocoa beans from countries such as Ghana and The Ivory Coast (as West Africa accounts for approximately 70% of worlds supply of cocoa beans). See exhibit 3. Historically, the main factors that adversely affect the cocoa crop (and thus increase the price of the commodity) in these countries, have been adverse weather, crop disease, and political unrest. However, Hersheys believes that if there is a marked disruption in any individual country, cocoa from other producing countries and from current physical cocoa stocks in consuming countries would provide a significant supply buffer until the issue is resolved. Thus, the general ability for the company to obtain cocoa is not significantly at risk in the near future.

Current Price
In early 2011, cocoa prices reached 37-year highs (over $3,800 per metric ton), but by the end of 2012, cocoa prices were nearing record lows of around $2,200 per metric ton (See exhibit 4). This goes to show the extreme volatility in the price of Hersheys main input, but it should be noted that Hersheys stated costs (across many of its raw materials, including cocoa) do not necessarily reflect market price fluctuations because of the companys forward purchasing and hedging practices.

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Future Price Predictions and Anticipated Effect on Hersheys

As of March 2013, the price of cocoa was $2,153 per metric ton. According to a director at Singapore-based Petra Foods, a worst case scenario could see global cocoa prices more than double by 2020, rallying to a level last seen 36 years ago of over $5,000 per metric ton, if production fails to catch up with demand. Raobank, a financial services group in Asia, has a less pessimistic view and expects prices to return to the 5-year average of around $2,750 per metric ton in the near to mid-term. While it is very difficult to accurately forecast the future price of any commodity, it should be noted that most experts are in agreement that cocoa is near its floor price and is only likely to increase in price in the years ahead. How much this will increase and how Hersheys will hedge this risk will be crucial to the companys future performance. Our findings, however, show that due to hedging, as well as important strategic moves such as price increases and varying the level of chocolate in their products as commodity prices rise, the company is not as susceptible to the world swings in cocoa price one might expect. Couple this with the efficiency programs and there are several years, recently, when cocoa and sugar prices are rising and Hersheys COGS are falling. (see exhibit 5). This fits with the company's reporting objective of income smoothing and is consistent with Hersheys public image as a stable and growing company.

Forwards and Hedging Strategy

Hersheys attempts to minimize the effect of future price fluctuations related to the purchase of major raw materials, primarily through forward purchasing to cover future requirements, generally for periods from 3 to 24 months. The company enters into futures contracts and other commodity derivative instruments to manage price risks for cocoa products, sugar and dairy products, among other things. By using futures and options contracts and other commodity derivative instruments in combination with forward purchasing of these raw inputs, the company tries to reduce the risk of future price increases and provide visibility to future

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costs. This is directly in line with management's reporting objectives of earning stability and predictability and the ability to consistently make a profit and pay out a stable dividend. However, the use of hedging and futures also limits the companys ability to take advantage of decreases in the prices of these commodities. As well, these instruments create a time lag such that current commodity prices are not necessarily reflected in the financial performance of the company at this point in time, creating the potential for current numbers to seem either under or overstated depending on the direction of future commodity movements. The important thing for Hershey is to keep hedging itself to a level similar to its competitors so as not to give them a competitive advantage in the case of commodity price fluctuations. Keeping an eye on the fluctuations in these commodities and how Hersheys manages them is absolutely key to understanding the company.

Financial Statement Analysis of Hersheys

Recasting of Financial Statements
As previously discussed, there are several non-recurring expenses as well as a large concentration of sales by one buyer. Both of these factors have implications on Hersheys financial statements and performance. We have divided these factors into two scenarios Normal and Worst and have analyzed the financial performance under each scenario. Financial statements and ratios for both the scenarios are given under exhibits (see exhibits 6 and 7).

Normal Scenario
Hersheys financial statements have been recast to give a true picture of the business under normal operating conditions. Thus, the companys financial statements (income statement and balance sheet) as at December 31, 2012 have been adjusted to reflect what we believe to be the true picture of the company. The items adjusted under the recast statements are as follows: 16

Income Statement
Business realignment and impairment charges: In 2012, total cost for Project Next Century was $76.3 million. Since this is one time transition, we do not expect this cost to occur in normal business operating expenses. Therefore, we will deduct $76.3 million from expenses. In 2012, company took an impairment charge of $7.5 million on Tri-US. Tri- US decided to cease its operations and dissolve the company. Since Hersheys had an equity stake in that company, it had to write-off its partial equity contribution of $7.5 million. Since this is also an exceptional situation, we don't expect these charges to be reflected in normal course of business. Total of $83.7 million was recorded as business realignment and impairment charges. Brookside Foods Ltd. Acquisition: Hersheys recorded expenses of $12.7 million as the integration costs for Brookside. Furthermore, the companys short-term debt and interest expenses also increased to finance the acquisition. We believe that these costs are one-time expenses and hence will not occur in normal business operations. Thus, the companys interest expenses can be assumed to be closer to the 2011 interest expenses in case of normal business practice. Overall, by taking all of the above into consideration, recast net income of the company will increase by around $68 million (after tax).

Balance Sheet
Hersheys hasn't provided detailed information on inventories and receivables to determine the actual value of both of these asset classes. In the company's annual report, it has not given details on the aging of receivables and inventory and its therefore not possible to determine the proportion of receivables that are likely to be collected or the inventory that may not be sold. The company uses the LIFO method for the majority of its inventory policy, whereas remaining inventories are priced at the lower of FIFO cost or market. As on December 31, 2012, the company accounted for $331.7 million inventory using the LIFO method, whereas the

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remainder was accounted for using the lower of FIFO cost or market. Hence, we believe that half of the companys inventory is not priced at market, however as per information provided in the financial statements its not possible to truly determine the actual market value of inventory. Hersheys MD&A report mentions that 22% of its sales are made to McLane Company, which is by far the largest buyer of the companys products. However, in an accounts receivables note, Hersheys states that 19.6% of its receivables are attributable to Wal-Mart and 17.9% of its receivables are attributable to McLane Company. Since McLane Company is the primary distributor of Hershey goods to Wal-Mart, we believe that a total of 37.5% of Hersheys receivables are either directly attributable to or originally passed through the McLane Company, which represents a massive credit risk. In order to smooth this number and appear less risky, the company has mentioned Wal-Mart as its debtor but it may indeed be an indirect debtor, while the companys direct debtor in this regard is likely the McLane Company. Certainly, in line with being seen as a stable and low risk company, this makes sense from a management perspective, but should be viewed with caution from a shareholders perspective. In summation, in terms of inventories and receivables reporting, we find that company has used creative accounting to distort the true picture of its credit risk and fair value of its receivables and inventory. As far as the companys market value of fixed assets are concerned, Hersheys hasnt provided enough information to determine the market value of plant, property and equipment, and due to management objectives, it may be wise to keep this in mind moving forward.

Worst Scenario
Income Statement and Balance Sheet
Loss of Revenues from McLane Company: In case McLane Company decides not to distribute Hersheys goods, Hershey will lose total revenue of USD 1.45 billion based on 2012 statements and net income of approximately USD 145 million.

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Bankruptcy of McLane Company: Though McLane Company has a very good credit rating, in case of bankruptcy, we expect the receivables from McLane company to go bad and Hershey may have to take USD 77.9 million as bad debt expense, thus reducing the net income by same. Impairment of Goodwill: In case company is not able to run the acquired companies well as it is planning and due to above events or due to unfavorable circumstances, Hershey may have to take impairment of its goodwill and intangibles. Hersheys have approximately USD 803 million of goodwill and intangibles and hence company may have to take impairment of the same.

Revenue Recognition
Hersheys recognizes revenue when the following requirements are met (as stated in the company's annual report). 1) A valid customer order with a fixed price has been received 2) The product has been delivered to the customer 3) There is no further significant obligation to assist in the resale of the products 4) Collectability is reasonably assured However, net sales are calculated net of trade promotions and other sales incentives, which may inflate this number and serve to make the companys top line performance appear better than it actually is.

Financial Analysis
Our analysis of Hersheys financial performance is largely based on historical ratios for the past 10 years data. Auditors have provided a clean opinion on all the financial reports and thus the reports are considered reliable for financial analysis. We believe looking back to 10 years of data regarding the financial information will provide a good insight on their financial performance and will help us to outline some financial indicators that may affect their financial performance in future.

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Profitability
Revenues: During the last 10 years, Hersheys average 10-year growth increased from 1.81% in 2003-2004 to 2.93% 2011-2012. The increase in revenues has been primarily brought about through the following important factors: 1) Increase in prices of Hersheys products 2) Increase in volume sold 3) Companys expansion in international markets (primarily India, China and Brazil) 4) Moderate growth in US market. 84% of the companys revenues are from the US and the remaining 16% are from international markets. Hersheys major strategy is to grow its sales volume through expanding into international markets by acquisitions. Acquisitions give Hersheys both product diversity and new market opportunities, thereby resulting in higher sales volumes. Hersheys is trying to capture significant value through acquisitions. As discussed, quite often, its equity investments are initially fairly small, followed by the full acquisition if the business model is successful. The companys investments in China and India are currently valued at more than the company initially paid. Hersheys investments in growing markets indicate that the company's revenues will continue to increase in international markets, however these markets are more price sensitive than US and far less brand conscious. How much the company will be able to translate the increased revenues into higher EPS will depend on its cost cutting measures, supply chain productivity and ability to transfer the cost increases that come with expansion, to end consumers. Margins: During the last 10 years, the company has made significant investments to improve its both its productivity and its margins. In 2007-2008, the company made an investment of $530 million in a supply chain transformation program to enhance its manufacturing, sourcing and customer service capabilities. As a result of this investment, companys profitability was lower in

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both 2007 and 2008. However this investment ultimately enabled the company to improve its operating and net profit margins substantially. In 2012, the company recorded 43% gross margin versus 39% in 2003. In 2010, the company implemented its Next Century Program as an ongoing effort to improve its supply chain and create a more competitive cost structure. The total cost of this implementation was around $200 million, which included transfer of significant production into a newly expanded facility. Apart from investing in acquisitions and productivity improvements, Hersheys is also leveraging its higher margins to invest heavily in marketing and selling expenses. As a result, the companys SM&A expense as a percentage of sales increased from 19.57% in 2003 to 25.64% in 2012, thereby reducing operating profit margin from 19.1% in 2003 to 16.7% in 2012. Overall, due to substantial growth in margins and moderate growth in revenues, Hersheys has been able to increase its EPS from $1.73 in 2003 to $2.89 in 2012, and this growth is expected to continue well into the future. It is pertinent to mention that the companys profitability is highly dependent on prices of cocoa, peanuts and dairy, which will be discussed in more detail below. However, as discussed, the company has been able to mitigate some of the risk of commodity price volatility by booking future contracts (generally from 3 to 24 months). By booking future contracts, Herseys is able to determine its cost of production in advance and, thus, transfer the impact of higher costs to end consumers smoothly, although not without some lag. This is directly in line with their reporting objectives of showing stability, smooth profits and continued growth. Any significant cost input increases will be passed on to end consumers with little impact to overall profitability. Similarly, the company has a policy of booking future contracts in a variety of the currencies it deals in, which also mitigates the currency risk arising from international operations (which are expected to be an increasingly important aspect of Hersheys operations moving forward). By taking a macro view of companys operating performance, we can see that company is enjoying very healthy margins on it products currently, and reinvesting the money into international expansion, cost cutting measures and marketing expenses. This investment will 21

help the company to increase its revenues in the long run, without compromising its margins, and thus will contribute to it continued EPS growth and long term objective of returning top notch shareholder value.

Balance Sheet
Liquidity: Hersheys current ratio during the past 10 years has decreased from 1.93x in 2003 to 1.44x in 2012, however it is still at a level at which it can pay its current liabilities. Furthermore, it is not uncommon for growing firms to reflect lower current ratios, especially when the return on assets is increasing. The companys return on assets has increased from 12.96% in 2003 to 14.42% in 2012. The company has being able to negotiate better trading terms with its suppliers and buyers. Hersheys days payables has increased dramatically, from 18.41 in 2003 to 41.57 days in 2012, which allows them to use the cash they are delaying paying for other purposes in the interim. At the same companys receivables days has decreased from 34.05 days in 2003 to 23.65 days in 2012. Overall companys cash conversion cycle has reduced from 87.08 days in 2003 to 43.91 days in 2012. These are all positive signs for the company. Improving cash cycle conversion along with higher revenues and better margins has helped the company to increase its free cash flow per share from $1.42 in 2003 to $3.58 in 2012. As of December 31, 2012, the company had cash and equivalents of approximately $730 million. This cash is enough for the company to honor its payment on its long-term debt obligation of $257.7 million in 2013. Even if the company makes acquisitions equivalent of its cash balance in 2012, it has revolving credit facility of $1.5 billion available to meet working capital and debt payment requirements. If needed, the company could easily raise additional debt capital since it has a very favorable credit rating from both Moodys and S&P. Overall, we believe that the company is in a very healthy liquidity state and can easily meet its working capital needs and honor its debt obligations.

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Leverage: The companys financial leverage during the past 10 years has increased from 2.80x in 2003 to 4.59x in 2012. Furthermore, companys debt/equity ratio has increased from 0.76x in 2003 to 1.48x in 2012. Even though companys debt burden has increased, it is important to note that the debt taken has helped the company to significantly increase its revenues and margins. The following are the reasons that high leverage is not a serious concern for Hersheys. 1) Hersheys has high credit ratings from Moodys and S&P, indicating the company can easily pay its debt obligations (and likely raise additional capital if need be) and hence shareholder value will not be compromised. 2) The companys interest coverage ratio as at December 31, 2012 was 11.31x, indicating that companys operating cash flows can easily service the companys debt and, in order to service its debt obligations, the company will not need to take on any additional debt. 3) Through 2016, the company has long-term debt payments that will be around $1 billion. As per the information provided by the company, Hersheys has not indicated any near-term major acquisitions or unusually large Capex in coming years. Hence we can assume the companys operating cash flows will be used primarily to pay its debt obligations, which, as a result, reflect the fact that companys leverage and debt to equity ratio will likely decrease in coming years.

Comparison of Hershey financial performance with Industry and Global Players:

Name P/E Curr Ratio Interest Coverage Financial Leverage Gross Margins ROE (%) ROA (%) Average 29.88 1.89 274.52 2.58 34.71 19.71 7.59 HERSHEY CO/THE 26.79 1.44 11.09 4.84 43.04 69.79 14.43 MONDELEZ INTERNATIONAL INC-A 13.64 1.05 2.93 2.51 37.34 8.98 3.58 KELLOGG CO 18.86 0.75 5.94 6.44 38.28 45.60 7.09 TOOTSIE ROLL INDS 36.63 3.25 507.15 1.30 33.34 7.90 6.10 LINDT & SPRUENGLI AG-REG 36.17 2.50 92.95 1.53 16.25 10.59 SNYDERS-LANCE INC 26.59 2.07 9.99 1.88 33.29 6.93 3.68 J & J SNACK FOODS CORP 24.47 3.78 1,163.93 1.27 30.11 11.92 9.38 WANT WANT CHINA HOLDINGS LTD 35.12 1.92 52.37 2.25 39.54 37.86 16.82 ORION CORP 40.82 1.21 6.86 2.67 43.06 16.29 6.10 BARRY CALLEBAUT AG-REG 19.60 1.73 4.86 2.66 13.93 11.04 4.16 M DIAS BRANCO SA 19.83 2.24 11.86 1.47 40.13 21.31 14.51 LOTTE CONFECTIONERY CO LTD 28.59 1.91 6.69 1.51 36.62 3.50 2.31 ULKER BISKUVI SANAYI AS 25.71 1.98 2.73 2.97 21.48 17.04 5.73 PETRA FOODS LTD 79.34 1.29 56.54 3.63 31.91 8.31 2.29 CALBEE INC 28.31 2.11 2,449.40 1.40 42.31 9.58 6.83 GENERAL MILLS INC 17.69 0.96 7.02 2.92 36.29 22.99 7.88

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The below comparative analysis is based on the global industry in which Hershey operates (the source of the global industry financial data is Bloomberg). Profitability: As per December 2012, company had a gross profit margin of 43%. The industry average as per Bloomberg is 34.7%. Higher gross profit margin of Hersheys shows the distinctive advantage company has on its COGS as a result of investments made in supply chain productivity and competitive cost structure improvements. The companys net profit margin as per the latest financial period was 9.95% versus 7.84% for global industry. Liquidity: The average current ratio for the industry is 1.88x, whereas Hershey has a current ratio of 1.44x. Furthermore, Hershey's free cash flow per share is $3.72 whereas for the industry, it is $73.17. The industry averages are higher than Hersheys liquidity figures due to the fact that Hersheys has been making investments to improve supply chain productivity and also making acquisitions to increase its international revenue stream. It is normal for a company to have tighter liquidity when its in a growth stage. However, it is pertinent to mention that company does have $1.5 billion of short-term debt facility available, to ensure it can fulfill its working capital requirements. Hersheys has been able to negotiate better terms of trade with its suppliers and buyers, on average, compared to its industry peers, over the years. Its cash conversion cycle is 43.9 days whereas the average cash conversion cycle is 96.4 days. This is a significant advantage to Hersheys as they are able to hold on to their cash for longer periods of time. Leverage: The companys long-term debt/equity ratio is 1.8x as against industry average of 0.77x. The higher leverage of Hersheys is due to investments made in acquisitions and supply chain productivity. In next 4 years, the company has debt payments of $1 billion coming due and, as mentioned above, the companys operating cash flows will retire the majority of the debt in coming years. We believe that as a result of this, Hersheys leverage will improve in the near to mid-term.

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Return on Equity & P/E: Hersheys return on equity is highest among its industry peers. Hersheys ROE as of December 31, 2012 was 70% versus an average of 19% for the industry. Again, the robust ROE is a result of the long-term investments the company had made to gain a more competitive cost structure. Considering the company is expanding aggressively into overseas markets, its return on equity may get compromised in the near term, but we believe it will still be above its peers in the industry, due to its massive current advantage. The companys P/E ratio is 26.45 (December 31, 2012) versus an industry P/E ratio of 29.78. Its stock price is currently $72.22 (December 31, 2012). The P/E will be discussed in more detail a little later. Overall, Hersheys has better gross margins, profit margins and a higher return on equity than its industry peers. However, it is falling behind in liquidity and leverage. Considering the company will be paying the majority of its long term debt in the next four years and, at the same time, expanding aggressively into international markets, we believe that Hersheys liquidity and leverage ratio should come into line with the industry average. However as a result of its better profitability and returns, its stock price and associated valuation may increase, assuming the company maintains its average historical P/E ratio in coming years.

Financial Forecast
Assumptions
In order to understand our financial forecast, we must first understand what assumptions we have made when estimating the various line items: 1) The net sales for the previous 3 years have grown by between 7.0% and 7.2%, except for last year when it was 9.3%, which was inflated due to the acquisition of Brookside that added 1.9% to top line sales. To project the net sales growth in the future we have broken down the sales into two segments US and international. The US chocolate market is projected to grow at 3% annually, however we expect Hershey to benefit from an additional 2% due to the diversification of its portfolio, due in part to the Brookside acquisition, and a modest increase in sales of its current products, dropping to the market growth rate of 3% in the long-term. We

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expect Hersheys main growth opportunities to come from its international expansion, particularly in BRIC countries. Based on our estimate this will account for 26.2% of net revenues in 2017, which is in line with Hersheys projection of 25%. This international growth will be high at 22% as Hershey focuses on its most successful brands, going down to 15% in 2017 as the most popular products reach saturation and Hershey introduces the more of its portfolio. 2) The cost of sales is the most challenging to evaluate since it varies based on Hersheys increased efficiency and somewhat with the fluctuation in the cost of inputs (mainly cocoa). Although Hersheys hedges using future contracts, the maximum length of these contracts is 24 months. In the event of a long-term increase in input prices, the effect on cost of sales might be more noticeable, although, as discussed, this might be offset by increasing the price of the product or, as they have done in the past, reducing the amount of chocolate in the product. However this might not be possible in all situations and, thus, a sensitivity analysis on the EPS and share price is provided in the exhibits. For the purpose of this forecast we assume that the cost of sales will be 56% of net sales in 2013 and improving to 54.5% by 2015 as the effects of Project Next Century take effect. 3) SM&A expense has historically been a constant percentage of sales with little variation, thus we have used 24.95% of net sales as a representative figure. 4) Business realignment and impairment was forecast to be $0 in future years as we have no reason to believe Hershey will undergo these charges in future, although historically they have done so. 5) Interest expense is estimated by assuming that Hershey will pay its long-term debts when they reach maturity. The amount of debt and corresponding interest rates are provided in the financial statements, along with maturity dates. This is a reasonable assumption, since Hershey has large cash reserves and is generating significant income from operations. 6) We assume the tax rate Hersheys pays will remain unchanged from previous years, and will stay at 34.7% moving forward. 26

7) To estimate the future share price we use the EPS, which we have calculated using the assumptions stated above and multiply it by the projected P/E ratio. The current P/E ratio of 29.93 (April 11th 2013) is more than 2 standard deviations (Exhibit 10) from the average as well as being the historical high. This tells us that the P/E ratio is well outside what could be considered normal for Hersheys. This can be explained in part from the recent improvement in margins and the increase of almost 10% in prices in recent years. This is further illustrated by the fact that Hersheys share price has doubled the performance of the S&P 500 since the recession of 2008, although it has a historical Beta of 0.25 (according to Google finance). However these improvements are not sustainable and we expect the P/E to return to the historical average of approximately 21 in the long term as Hersheys growth begins to decline. This is a reasonable assumption since it represents the historical value investors have been willing to pay for earnings from Hersheys. These high P/E ratios are also present in Hersheys competitors and might be explained by the recent low cocoa prices leading investors to believe the chocolate industry will see increasing profits in the near term. In Hersheys case this is further compounded by the anticipated growth related to the recent improvements in margins due to investments in supply chain productivity.

Future Outlook
Based on our financial forecast we predict that Hersheys will continue its stellar performance. Based on these results we expect the EPS to be $3.64 at the end of 2013. At the current P/E ratio of 29.93 (April 11th 2013) this would represent a share price of $ 108.95. Since the current share price is $86.61 (April 11th 2013) this would initially seem to indicate that Hershey would be a good investment. However, as stated above, this level of performance is not sustainable and we anticipate that it will return to historically normal levels within the next five years. Using the historical average P/E (since 1986) of 21 as a long term target, we come to a price of $101.89 by the end of 2013. Looking to our sensitivity analysis on the P/E we look at a P/E of between

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25 and 31 for 2013, giving us a price range of $90.98 to $112.81. Since the current price is $86.61 (April 11th 2013), this leads us to the conclusion that Hersheys is currently a buy, which is further corroborated by the fact even in the worst case scenario we still forecast the price of the stock to increase, although moderately in years to come. The outlook is significantly better in our current estimations and best case scenarios.

Sensitivity Analysis
As stated above, the biggest risk to Hersheys bottom line is the cost of sales. In the last five years, the cost of sales has been between 57% and 66% although, with the completion of the Next Century Program, we ultimately expect this to improve to 56%. Since the cost of sales is difficult to predict due to constant improvements in efficiency by Hershey and fluctuating input prices, we have performed a sensitivity analysis in the exhibits looks at the effect of cost of sales (with a range of 54% to 57% to represent expected cost of sales after improvements) on the EPS and share price. Looking at the EPS for end of year 2013, we expect it to be $3.64. With a cost of sales of 54% it would be $4.05, which would be a 11% improvement; however with a cost of sales of 57% it would be $3.40, a drop of 7%. As expected, the EPS is highly sensitive to the cost of sales. Consequently, the share price is also highly sensitive to variation in the cost of sales. Based on the financial model, the estimated share price with a cost of sales of 56% is $101.89, at 54% cost of sales it is $113.34, at 57% cost of sales it is $96.17. Finally looking at the prices sensitivity to P/E, with a P/E of 28 in 2013 the price would be $101.89; looking at the best case with a P/E of 31 the price would be $112.81, which would be an 11% improvement; however with a P/E of 25 the price would be $90.98, a drop of 11%. Naturally the P/E used in our valuation model affects the share price, however this gives us a range of $90.98 to $113.34 for the share price at the end of the year, which makes Hershey a definite buy.

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Conclusion
In conclusion, Hershey embodies operational excellence demonstrated by their industry leading gross margins; this competitive advantage allows Hershey to thrive in the chocolate industry. Their long history points to reporting objectives that emphasize stable growth, thus when reading their financial statements we must beware of possible income smoothing and other creative accounting policies. Hershey uses financial instruments to hedge itself against commodity and currency fluctuations. Their continued investments in supply chain efficiency have made them a major force in the US chocolate industry, and their expansion into international markets provides growth opportunities for the future. Through our recasting of the financial statements we have determined that even in the worst-case scenario, Hersheys business operations are sustainable and they will remain the industry leader in gross margins. Although, at a first glance a P/E of almost 30 might seem high for a consumer staple company, investors believe in the future growth of the chocolate industry, which is demonstrated by the high P/E of Hersheys competitors. Looking at the forecast for the future it becomes clear that from an equity perspective Hershey is a sound investment and should provide stock growth in the future. We estimate Hersheys share price to be $101.89 by the end of 2013. However, do to the sensitivity of the model to the cost of sales and P/E, which are difficult to predict, we expand our confidence interval to $90.98 to $113.34 by the end of 2013, in all cases a significant improvement over Hersheys current share price of $86.61.

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Appendix Exhibit 1:
HSY Stock Price (1996 to 2013):

&

&

Exhibit 2:
HSY Dividend History (1996 to 2013):

&

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Exhibit 3:
World Supply of Cocoa Beans (69% from West Africa - Ivory Coast, Ghana, Cameroon, Nigeria)

Exhibit 4:
World Cocoa Prices (2006 - 2012)

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Exhibit 5:
Hersheys Cost of Goods Sold vs. Raw Inputs (2008 - 2012)

&

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Exhibit 6: (Normal Scenario)

&
in#millions Income*Statemet Net#Sales Cost#of#Sales SG#&#A Business#Realignment#Charges Income*Before*Interest*and*Income*Tax Interest#Expense Income*Before*Income*Tax Provision#for#Income#Taxes Net*Income EPS Dividends*Paid Retained*Earnings 2012 ######6,644 ######3,745 ######1,691 ########### D ######1,207 ############92 ######1,115 ##########387 ##########728 ######### 3.18 in#millions Balance*Sheet Current#Assets Cash#and#Equivalents Accounts#Receivables Inventories Deffered#Income#Taxes Prepaid#expenses Total*Current*Taxes Property#Plant#&#Equipment Goodwill Other#Intangibles Deffered#Income#Taxes Other#Assets Total*Assets Current#Liabilities Accounts#Payables Accrued#Liabilities Accrued#Income#Taxes Short#Term#Debt Current#Portion#of#Long#term#debt Total*Current*Liabilities Long#Term#Debt Other#Long#Term#Liabilities Deferred#Income#Taxes Total*Liabilities Stockholders#Equity Total#Stock#Holders#Equity Total*Liabilities*and*Equity 2012

##########796 ##########461 ##########633 ##########122 ##########168 ######2,181 ########### D ######1,674 ##########588 ##########215 ############12 ##########152 ########### D ******4,823 ########### D ########### D ##########442 ##########651 ############### 2 ##########118 ##########258 ######1,471 ########### D ######1,531 ##########669 ############36 ########### D ######3,706 ########### D ########### D ######1,116 ########### D ******4,823

&

&

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Exhibit 7 (Worst Case Scenario)

in#millions Income*Statemet Net#Sales Cost#of#Sales SG#&#A Business#Realignment#Charges Income*Before*Interest*and*Income*Tax Interest#Expense Income*Before*Income*Tax Provision#for#Income#Taxes Net*Income EPS Dividends*Paid Retained*Earnings 2012 #######5,194 #######2,958 #######1,410 ###########848 ************ (22) #############75 ************ (97) ############ (34) ************ (63) ########(0.28) in#millions Balance*Sheet Current#Assets Cash#and#Equivalents Accounts#Receivables Inventories Deffered#Income#Taxes Prepaid#expenses Total*Current*Assets Property#Plant#&#Equipment Goodwill Other#Intangibles Deffered#Income#Taxes Other#Assets Total*Assets Current#Liabilities Accounts#Payables Accrued#Liabilities Accrued#Income#Taxes Short#Term#Debt Current#Portion#of#Long#term#debt Total*Current*Liabilities Long#Term#Debt Other#Long#Term#Liabilities Deferred#Income#Taxes Total*Liabilities Stockholders#Equity Total#Stock#Holders#Equity Total*Liabilities*and*Equity 2012

##########728 ##########383 ##########633 ##########122 ##########168 ******2,036 ######1,674 ########### T ########### T ############12 ##########152 ******3,874

Other#items#on#Income#Statement,#ones that#are#not#effected#from#recasting#are calculated#as#per#percentage#of#sales

##########442 ##########651 ############### 2 ##########118 ##########258 ******1,471 ######1,531 ##########669 ############36 ******3,706

##########168 ******3,874

Ratios& P/E$ ROE$ Current$Ratio$ Interest$Coverage$ Leverage$ Gross$Margin$ Net$Profit$Margin$ ROA$

Now& 26.45$ 69.79%$ 1.44$ 11.09$ 4.84$ 43.04%$ 9.95%$ 14.42%$

Normal& $$$$$$$$$$$ 24.04$$ 65.23%$ 1.48$ 15.38$ 3.32$ 43.63%$ 10.96%$ 15.10%$

Worst& Industry&Average&Now& $$$$$$$$$$$$$$$ +$$$$ 29.88$ +37.69%$ 19.71%$ 1.38$ 1.89$ 2.51$ 274.52$ 22.10$ 2.58$ 43.05%$ 34.71%$ +1.22%$ 7.84%$ +1.63%$ 7.59%$

&
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&

Exhibit 8:

Hershey
2010 $,,4,843.03 $,,,,,, 827.97 $,,5,671.00 $,,3,255.80 $,,2,415.20 $,,1,426.50 $,,,,,,,,83.40 $,,,,,, 905.30 $,,,,,,,,96.40 $'''''299.10 $'''''509.80 $,,,,,,,,,,2.21 $,,,,,,,,47.15 21.33 2011 $,,5,132.20 $,,,,,, 948.60 $,,6,080.80 $,,3,548.90 $,,2,531.90 $,,1,477.80 M$,,,,,,,,,,0.90 $,,1,055.00 $,,,,,,,,92.20 $'''''333.90 $'''''628.90 $,,,,,,,,,,2.74 $,,,,,,,,61.78 22.55 2012 $,,5,574.57 $,,1,069.73 $,,6,644.30 $,,3,784.40 $,,2,859.90 $,,1,703.80 $,,,,,,,,45.00 $,,1,111.10 $,,,,,,,,95.60 $'''''354.60 $'''''660.90 $,,,,,,,,,,2.89 $,,,,,,,,71.44 24.72 2013 $,,5,853.30 $,,1,302.32 $,,7,155.62 $,,4,007.15 $,,3,148.47 $,,1,785.33 $,,,,,,,,,,,,M $,,1,363.15 $,,,,,,,,88.71 $'''''442.23 $'''''832.21 $,,,,,,,,,,3.64 $,,,,,, 101.89 28 2014 $,,6,116.69 $,,1,548.34 $,,7,665.03 $,,4,215.77 $,,3,449.26 $,,1,912.43 $,,,,,,,,,,,,M $,,1,536.84 $,,,,,,,,75.82 $'''''506.97 $'''''954.05 $,,,,,,,,,,4.17 $,,,,,, 108.47 26 2015 $,,6,361.36 $,,1,815.20 $,,8,176.56 $,,4,456.22 $,,3,720.33 $,,2,040.05 $,,,,,,,,,,,,M $,,1,680.28 $,,,,,,,,75.76 $'''''556.77 $''1,047.76 $,,,,,,,,,,4.58 $,,,,,, 109.96 24 2016 $,,6,584.01 $,,2,102.02 $,,8,686.03 $,,4,733.89 $,,3,952.14 $,,2,167.16 $,,,,,,,,,,,,M $,,1,784.98 $,,,,,,,,63.47 $'''''597.37 $''1,124.15 $,,,,,,,,,,4.92 $,,,,,, 113.06 23 2017 $,,6,781.53 $,,2,407.54 $,,9,189.07 $,,5,008.04 $,,4,181.02 $,,2,292.67 $,,,,,,,,,,,,M $,,1,888.35 $,,,,,,,,45.94 $'''''639.32 $''1,203.10 $,,,,,,,,,,5.26 $,,,,,, 115.74 22

Net,Sales,US Net,Sales,International Net,Sales,Total Cost,of,Sales Gross,Profit SM&A,Expense Business,Realignment,and,Impairement EBIT Interest,Expense,,Net Provision,for,Income,Taxes Net,Income EPS Share,Price P/E,ratio

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Exhibit 9:

Sensitivity.of.EPS.to.Cost.of.Goods.Sold
!$7.00 !$6.00 !$5.00 !$4.00 !$3.00 !$2.00 !$1.00 !$# 2010 2011 2012 2013 2014 2015 2016 2017 Year

EPS

Best!Case Worst!Case

Current

Sensitivity&of&Share&Price&to&Cost&of&Goods&Sold
!$140.00

!$120.00

Share&PRice

!$100.00 !$80.00

!$60.00
!$40.00 !$20.00 !$# 2010 2011 2012 2013 2014 2015 2016 2017

Best!Case Worst!Case Current

Year

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Sensitivity$of$Share$Price$to$P/E$in$2013$
&$140.00&& &$120.00&& Share$PRice$ &$100.00&& &$80.00&& &$60.00&& &$40.00&& &$20.00&& &$I&&&& 2010& 2011& 2012& 2013& 2014& 2015& 2016& 2017& Best&Case& Worst&Case& Current&

Year$

Exhibit 10:&
Normal distribution of Hersheys historical P/E ratio shows that at current levels occur less than 0.13% of the time, well outside the norm.

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&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&
http://www.marketsandmarkets.com/PressReleases/global-chocolate-market.asp http://www.statista.com/statistics/238131/estimated-cagr-of-the-global-chocolate-market-by-region/ 3 http://www.forbes.com/sites/jennagoudreau/2013/03/04/hersheys-provocateur-in-chief-pushes-thecandy-company-to-10-billion/ 4 http://www.marketsandmarkets.com/Market-Reports/global-chocolate-market-164.html 5 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=axJIJTK6olhs 6 http://www.reuters.com/article/2007/02/15/idUSIN20070215080432HSY20070215 7 http://www.behance.net/gallery/HERSHEYS-PREMIUM-CHOCOLATE/5005935& 8 http://www.foodbusinessnews.net/articles/news_home/Business_News/2013/02/Innovation_and_expansi on_lead.aspx?ID={9F2805D7-BB1D-49E3-A810-A8E7DD2396D0}
2 1

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