Morningstar Report-636d1777e26a17cb57991444

Morningstar Equity Analyst Report | Report as of 21 Dec 2023 00:58, UTC | Reporting Currency: USD | Trading Currency: USD
| Exchange: NEW YORK STOCK EXCHANGE, INC. Page 1 of 22
The Hershey Co HSY QQQQ 20 Dec 2023 22:21, UTC
Last Price Fair Value Estimate Price/FVE Market Cap Economic MoatTM Equity Style Box Uncertainty Capital Allocation ESG Risk Rating Assessment1
179.52 USD 197.00 USD 0.91 37.33 USD Bil Wide 5 Mid Blend Low Standard ;;;;;
20 Dec 2023 10 Nov 2023 16:30, UTC 19 Dec 2023 6 Dec 2023 06:00, UTC
Price vs. Fair Value
Fair Value: 197.00

10 Nov 2023 16:30, UTC
400
Last Close: 179.52
300 Over Valued
Under Valued
200
100
0
2018 2019 2020 2021 2022 YTD Analysis
0.91 1.14 1.15 1.36 1.37 0.91 Price/Fair Value
-3.15 39.92 5.79 29.25 21.70 -20.55 Total Return %
Morningstar Rating
Total Return % as of 20 Dec 2023. Last Close as of 20 Dec 2023. Fair Value as of 10 Nov 2023 16:30, UTC.
Contents
Business Description Hershey Looks to Sweeten Edge With Judicious Investments
Business Strategy & Outlook (10 Nov 2023)
Bulls Say / Bears Say (10 Nov 2023) in Its Brands and Manufacturing Network
Economic Moat (10 Nov 2023)
Fair Value and Profit Drivers (10 Nov 2023)
Business Strategy & Outlook Erin Lash, CFA, Sector Director, 10 Nov 2023
Risk and Uncertainty (10 Nov 2023)
Consumers' penchant for confectionery and snacking fare has yet to fulfilled, as evidenced by the
Capital Allocation (10 Nov 2023)
Analyst Notes Archive outsize organic sales growth Hershey has chalked up the past few quarters. But from our vantage point,
Financials this isn't merely a byproduct of a favorable demand environment. Rather, we applaud the strategic
ESG Risk focus CEO Michele Buck has brought to bear over the past six years--ramping up investments in its core
Appendix
domestic brands while pulling back in its international arm (high-single-digit percentage of total sales,
Research Methodology for Valuing Companies
where we surmise it lacks a competitive edge).
Important Disclosure
The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of
However, competitive and macro concerns abound, ranging from potential volume degradation as a
Conduct Policy, Personal Security Trading Policy (or an equivalent of), and
Investment Research Policy. For information regarding conflicts of interest, please byproduct of increased usage of weight-loss drugs to whether penny-pinching consumers could leave
visit: http://global.morningstar.com/equitydisclosures.
confectionery fare on the shelf in favor of more essential, daily products. Further, cocoa, sugar, and
The primary analyst covering this company does not own its stock.
labor costs remain elevated (with management calling for high-single-digit cost increases this year) and
The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk
1
Rating. could dent profits. Despite these looming headwinds, we surmise Hershey is playing from a position of
strength, given its dominant standing (controlling around 45% of the U.S. chocolate space, versus just
low-single-digit marks for lower-priced private-label offerings) combined with the robust resources it
maintains to ensure its lineup continues to evolve with consumer trends.
In this context, we’re encouraged that Hershey is firm in its commitment to funnel resources toward its
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Morningstar Equity Analyst Report | Report as of 21 Dec 2023 00:58, UTC | Reporting Currency: USD | Trading Currency: USD | Exchange: NEW YORK STOCK EXCHANGE, INC. Page 2 of 22
Sector Industry
s Consumer Defensive Confectioners brands, with advertising spending up around 20% in the third quarter; we think Hershey will expend a
high-single-digit percentage of sales (nearly $1 billion) toward research, development, and marketing
Business Description
Hershey is a leading confectionery manufacturer in the annually over the next 10 years. And even though management has been forthright that its innovation
U.S. (around a $25 billion market), controlling around pipeline was a bit scant in fiscal 2023, this coincided with stepped-up spending to build out its
45% of the domestic chocolate space (per IRI, as cited by capabilities and capacity (with capital expenditures set to approximate 7%-8% of sales, outpacing the
Hershey). Beyond its namesake label, the firm's mix has
less than 5% average that has historically characterized the business), which we see as prudent. And
expanded over the last 85 years and now consists of 100
with these investments in the rearview, we think Hershey intends to flavor its mix over the coming
brands, including Reese's, Kit Kat, Kisses, and Ice
Breakers. Hershey's products are sold in about 80 quarters.
countries, albeit with just a high-single-digit percentage
of sales coming from markets outside the U.S., including Bulls Say Erin Lash, CFA, Sector Director, 10 Nov 2023
Brazil, India, and Mexico. The firm has sought inorganic u Hershey has intentionally rationalized its fare over the past few years to ensure shelf space and
opportunities to extend its reach beyond its core advertising dollars are being allocated to the highest return opportunities.
confection business, adding Amplify Snack Brands and
u Low-priced competition is scant in the domestic confectionery space, as private-label fare holds just a
its Skinny Pop ready-to-eat popcorn to its mix, Pirate
low-single-digit share of U.S. chocolate, versus 45% for Hershey.
Brands, and Dot's Pretzels over the past few years.
u We posit its more recently acquired salty lineup complements its confectionery fare and unlocks
potential for innovation that blends the two taste profiles, which Hershey is uniquely positioned to
achieve.
Bears Say Erin Lash, CFA, Sector Director, 10 Nov 2023

u Consternation abounds as it pertains to the financial health of the consumer, given the mounting
pressure on pocketbooks, particularly for more indulgent and discretionary categories like confectionery
and snacking.
u Thirty-three percent of its employees across the globe operate under collective bargaining agreements.
With labor constraints proving a stranglehold on a large swath of businesses across industries, Hershey
may suffer as a portion of these contracts are renegotiated.
u Amplify has expanded Hershey's commodity basket and could exacerbate any volatility in raw material
costs.
Economic Moat Erin Lash, CFA, Sector Director, 10 Nov 2023

In our view, Hershey's solid intangible assets and cost advantage warrant a wide economic moat rating.
With its dominant share at home, leading brands, and sufficient resources, we believe Hershey is a
critical partner for retailers that are reluctant to risk out-of-stocks with unproven suppliers, supporting
the intangible asset source of its wide moat. As such, we expect the firm's returns on invested capital to
remain above its cost of capital over the next 20 years.
Hershey's dominant position in the U.S. confectionery industry is illustrated by the fact that it holds
about 45% share of the chocolate aisle compared with about 30% for its closest competitor, Mars/
Wrigley, and just a low-single-digit share for private label (as cited by the firm, according to IRI).
ß
Competitors
The Hershey Co HSY Conagra Brands Inc CAG Mondelez International Inc Class A MDLZ Nestle SA NESN
Fair Value Fair Value Fair Value Fair Value

197.00 33.00 73.00 116.00
Uncertainty : Low Uncertainty : Medium Uncertainty : Low Uncertainty : Low
Last Close Last Close

Last Close Last Close
179.52 28.36 69.33
96.58
Analysis
Economic Moat Security
Wide 1 Security
None 2 Security
Wide 3 Security
Wide 4
Currency USD USD USD CHF
Fair Value 197.00 10 Nov 2023 16:30, UTC 33.00 26 Oct 2023 22:41, UTC 73.00 2 Nov 2023 19:42, UTC 116.00 8 May 2023 09:29, UTC
1-Star Price 246.25 44.55 91.25 145.00
5-Star Price 157.60 23.10 58.40 92.80
Assessment Fairly Valued 19 Dec 2023 Under Valued 19 Dec 2023 Fairly Valued 19 Dec 2023 Under Valued 19 Dec 2023
Morningstar Rating QQQQ20 Dec 2023 22:21, UTC QQQQ20 Dec 2023 22:21, UTC QQQ20 Dec 2023 22:21, UTC QQQQ20 Dec 2023 18:06, UTC
Ioannis Pontikis, Senior Equity
Analyst Erin Lash, Sector Director Kristoffer Inton, Strategist Erin Lash, Sector Director
Analyst
Capital Allocation Standard Standard Standard Standard
Price/Fair Value 0.91 0.86 0.95 0.83
Price/Sales 3.37 1.15 2.75 2.71
Price/Book 9.41 1.58 3.39 7.13
Price/Earning 19.67 13.07 21.27 26.68
Dividend Yield 2.44% 4.63% 2.22% 3.05%
Market Cap 37.33 Bil 14.05 Bil 96.69 Bil 257.66 Bil
52-Week Range 181.27—276.88 25.16—41.30 60.75—78.59 96.57—116.84
Investment Style Mid Core Mid Value Large Core Large Core
Further, Hershey has continued to build on its market-leading position, gaining a few hundred basis
points of share since 2011 (which includes around a 100-basis-point boost to its chocolate share since
2020). Its outsize share extends across the U.S. confectionery space, where it controls approximately
31% of the category, up from 29% in 2011, versus Mars/Wrigley, whose share has eroded to 29% from
more than 31% over the same period. We believe this shows that although Hershey's niche is a category
characterized by indulgent offerings, the firm remains a trusted brand with consumers, who are
reluctant to sacrifice taste with an unproven supplier, and ultimately retailers. When combined with the
resources Hershey invests behind its brands (allocating 6%-7% of sales toward research, development,
and marketing on average over the past five years, or around $550 million annually) to drive customer
traffic into outlets, we believe the firm's retailer relationships are stickier than those of its smaller, less-
established rivals.
We contend that retailers prefer to stock brands that will drive traffic into their outlets and may be less
inclined to expend shelf space on unproven suppliers that likely lack the resources to satisfy supply
ß
chain needs. As such, we believe the firm's portfolio mix shift toward more on-trend categories, like
healthy snacks following the acquisitions of Amplify and Pirate Brands, has been prudent, given these
offerings align with consumer preferences for healthy and convenient fare. Prior to the pandemic,
consumers were increasingly shopping the perimeter of the store at the expense of center-of-store
categories, but we've been encouraged that Hershey has been working with its retail partners to ensure
its products are in front of consumers where they are shopping, stocking its wares underneath
checkouts, between self-checkouts, and at curbside pickups, which we view positively in light of the
intensely competitive environment in which it plays. We think these efforts align with our contention
that Hershey is poised to maintain its solid competitive positioning at home.
We also contend that Hershey maintains a cost edge, which should ensure it can fund investments to
support its leading brand mix and retail relationships to a greater extent than new entrants with limited
budgets, ultimately leading to a barrier to entry. This scale manifests in production and distribution
advantages across its expansive network. We believe this creates a virtuous cycle, starting with scale
that affords manufacturers a mutually beneficial relationship with retailers, through which the vendor
becomes an important retail partner rather than a mere supplier by developing sales strategies to
maximize volumes and retailers' margins, while also prioritizing its own brands. With a broad domestic
manufacturing and distribution network, we think Hershey operates with lower unit and distribution
costs, as well as greater supply chain efficiency and an enhanced ability to leverage brand spending,
than smaller peers. Further, we think that as a result of these cost advantages, Hershey can replicate
competitive products and ultimately offer it to retailers at a lower cost than its smaller peers. This stands
to limit the potential shelf space (and scale) new entrants can amass. As further evidence of the
strength of its competitive position, returns on invested capital, including goodwill, have consistently
exceeded our 7% weighted average cost of capital estimate by 3-4 times, averaging 25% the past five
years. We forecast that ROICs will average a similar level over the next 10 years, supporting our stance
regarding the firm's wide economic moat.
Questions have surfaced as to whether retail relationships will hold the same clout online, particularly in
snacking, where impulse purchases are common and small, niche startups are also vying for share. In
this context, we surmise Hershey has been working with its retail partners to tether its online and
offline strategies, an essential undertaking, given that three fourths of the time consumers dedicate to a
search online is spent on retailer websites. And we believe that the firm understands the necessity of
investing to build out this area of its business. For one, the firm's innovation efforts have included
updated packaging to appeal to online shoppers, with a focus on ensuring product and quantity are
clearly visible on website images of the item. Further, Hershey sells full-size bar variety packs to appeal
to the impulse purchaser and indulger online. Importantly, it is bringing these innovations to market in a
more timely fashion, with some of its recent endeavors taking just 12 weeks to move from concept to
shelf. These efforts have bolstered average selling prices online, which approximate 1-4 times the level
ß
Hershey derives across its portfolio in brick-and-mortar outlets. But management stressed that it isn't
abandoning efforts to help retailers drive traffic in physical stores, which we view as prudent in light of
our expectations that an omnichannel approach stands to best cater to consumers' evolving needs.
Fair Value and Profit Drivers Erin Lash, CFA, Sector Director, 10 Nov 2023
After digesting fair third-quarter marks, we're bumping up our fair value estimate for Hershey to $197,
from $196, primarily due to the benefit of time value. Our long-term forecast continues to call for around
4% average annual sales growth (2023-32) and operating margins holding around 22% on average
through fiscal 2032 (bang in line with the average level over the past five years). Our revised valuation
implies fiscal 2024 enterprise value/adjusted EBITDA of around 15 times.
With a sound strategic playbook, centered on driving efficiencies to fuel brand spend, we've long held
that Hershey is poised to support its competitive position long term. And while Hershey has been
intentionally rationalizing its mix to ensure its allocating shelf space to the highest-return opportunities
(which management cited as a 100-basis-point drag on fiscal 2018 organic sales, but has since ceased
quantifying), we view this as a judicious means to facilitate its ability to focus its resources on the
highest return opportunities. In our view, this is particularly critical in light of the pace at which
consumer trends are evolving and the degree to which competitive angst abounds.
Beyond working to prop up sales, Hershey has been attempting to extract another $150 million-$175
million in costs (a low- to mid-single-digit level of cost of goods sold and operating expenses, less than
the 6%-9% levels peers have targeted in their own efforts recently). About half of these savings are
expected to ensue from the firm’s loss-making international operations, partly as it works to improve
capital utilization outside the U.S., which has stood at a mere 40%—far below the 65% of its U.S.
operations. Further, we expect it to pursue efficiencies on its home turf—primarily through
manufacturing and supply chain improvement—but not at the expense of spending on advertising or
research and development, which we view positively. In this vein, we forecast Hershey will expend
around 7% of sales ($965 million) annually to support its brands and its entrenched retail relationships.
Risk and Uncertainty Erin Lash, CFA, Sector Director, 10 Nov 2023
Hershey's risk profile is defined by the culmination of competitive and macro forces and its exposure to
environmental, social, and governance issues, which we believe warrant a Low Morningstar Uncertainty
Rating. As its product mix skews toward indulgent, less healthy fare, Hershey's financial performance
could be strained if consumers opt for more healthful offerings. Further, to stem obesity, local
governments could mandate increased regulations and/or impose taxes, which may impair volumes
more than we currently forecast. With its dependence on West African countries for its cocoa supply
(areas known to utilize child labor), Hershey is also exposed to human rights issues within its supply
chain that could lead to reputational risk and ultimately heightened government oversight. However, we
ß
view its risk from ESG issues as low.
Beyond this, volatile input costs—particularly for cocoa, sugar, and dairy—may hurt Hershey's profits
from time to time. The impact can be especially pronounced for dairy costs, which can't be hedged.
Long term, we anticipate increased raw material demand in faster-growing emerging markets will keep
upward pressure on commodity costs, which may plague the firm. Hershey also faces heightened
competitive pressures from other confectionery players and snacking options outside the confectionery
aisle (a challenging predicament, as brick-and-mortar food channel traffic trends—particularly in
center-store categories—over a longer horizon have been lackluster).
Outside its home turf, these structural challenges have been compounded as chocolate is less ingrained
in the culture, is a more premium-priced product relative to other food categories, combined with
economic uncertainty, rampant inflation, and the outsize effect trade shutdowns had as governments
attempted to thwart the spread of COVID-19. Even though most markets have reopened, the malaise
around shopping trips, foodservice operations, and travel retail outlets remains.
Capital Allocation Erin Lash, CFA, Sector Director, 10 Nov 2023

We assign Hershey a Standard capital allocation rating, premised on its sound balance sheet, fair
investment strategy, and appropriate shareholder distributions. Further, we think Buck's focus on pulling
back on investing abroad to ensure that Hershey is sufficiently supporting its core domestic brands has
been prudent.
Hershey's balance sheet health is without question, with debt/EBITDA that has averaged around 2 times
the past five years. And we expect similar marks going forward. Further, we don't believe the business
exudes much in the way of cyclicality, which should continue to afford the opportunity to expend
resources toward reinvesting in organic and inorganic pursuits, while also returning cash to
shareholders.
In this manner, although its initial plan for stepped-up spending behind its supply chain and enterprise
resource planning was waylaid by the pandemic, management’s rhetoric suggests it's unwavering in its
commitment to the investment. In this context, Hershey is calling for $800 million to $850 million in
capital expenditures this year (which equates to a high-single-digit percentage of sales). This spending
(which is 300-400 basis points above the average percentage of sales directed to this area prepandemic)
is earmarked for bolstering capacity of its largest and fastest-growing brands, while also building
enhanced fulfillment and technological capabilities to enable it to meet consumers’ evolving needs and
further entrench its standing with leading brick-and-mortar and e-commerce retailers. From our vantage
point, these investments are a judicious way to ensure that the intangible asset source of its wide moat
isn’t diluted.
Beyond funneling resources to bolster its existing footprint and mix, Hershey has hungered for tie-ups in
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the past, and we anticipate that it will continue to do so. Excluding the challenges that ensued
following the tie-up with Shanghai Golden Monkey in December 2013, Hershey has tended to show
capital-allocation prudence, and we expect it to proceed in the same manner going forward. Further,
given the sizable ownership stake of the Milton Hershey School Trust (with around 80% of the voting
power, but less than one-third shareownership), we believe it is highly unlikely the firm will jeopardize
its stable cash flows to pursue a larger, more transformative deal. Rather, building off of its recent tie-
ups with Dot’s Pretzels, Pretzels Inc., and Lily’s, we surmise that Hershey is looking for niche operators
that boast more than $100 million in sales and possess strong gross margins but could benefit from
Hershey’s distribution reach and marketing prowess. However, we don't think such deals will
compromise Hershey's dividend. In this context, we forecast that Hershey will grow its dividend at a
mid-single-digit clip annually through fiscal 2032 (maintaining a payout ratio between 40%-50%), while
also repurchasing a low-single-digit level of shares outstanding annually), which we view as prudent if
executed at a discount to our assessment of intrinsic value.
Analyst Notes Archive
Hershey Earnings: Margin Gains Not Enough to Placate the Market, Rendering Shares a Bit
Undervalued Erin Lash, CFA, Sector Director, 26 Oct 2023
While our $196 fair value estimate shouldn’t see much change, the market continued to sour on wide-
moat Hershey despite fair third-quarter marks: 10.7% organic sales growth, 240 basis points of adjusted
gross margin expansion to 44.9%, and a 230-basis-point bump in adjusted operating margin to 24.9%. In
this context, Hershey’s stock price is down around 17% since January but has slid around 30% from its
peak in early May.
We attribute the weakness to a host of concerns, ranging from potential volume degradation as a
byproduct of increased usage of weight-loss drugs to whether penny-pinching consumers could leave
confectionery fare on the shelf in favor of more essential, daily products. Despite these looming
headwinds, we surmise Hershey is playing from a position of strength, given its dominant standing
(controlling around 45% of the U.S. chocolate space) combined with the robust resources it maintains to
ensure its lineup continues to evolve with consumer trends.
In this context, we’re encouraged that it is firm in its commitment to funnel resources toward its brands,
with advertising spending up around 20% in the period; we think Hershey will expend a high-single-digit
percentage of sales (nearly $1 billion) toward research, development, and marketing annually over the
next 10 years. And even though management has been forthright that its innovation pipeline was a bit
scant this year, this coincided with stepped-up spending to build out its capabilities and capacity (with
capital expenditures set to approximate 7%-8% of sales, outpacing the less than 5% average that has
historically characterized the business), which we see as prudent. And with these investments in the
rearview, we think Hershey intends to flavor its mix over the coming quarters.
ß
When taken together, the recent downdraft is creating an interesting opportunity for investors looking
to indulge, in our view, with shares trading below our intrinsic valuation for the first time in about four
years.
Hershey Earnings: Upward Sales Trajectory Buoyed by Stepped-Up Brand Spending; Shares Not a
Bargain Erin Lash, CFA, Sector Director, 27 Jul 2023
Wide-moat Hershey continues to ride the wave of consumers’ undying penchant for indulgent fare.
Organic sales edged up 5% in the second quarter, reflecting a nearly 8% benefit from higher prices
partially offset by a modest 2.7% downdraft in volumes (partly due to lapping pronounced retailer
inventory stocking last year). And we’re encouraged it continues to funnel resources toward its brands,
with advertising spending up nearly 15% in the period. This aligns with our forecast for Hershey to
expend a high-single-digit percentage of sales (nearly $1 billion) toward research, development, and
marketing annually. Further, we see prudence in efforts to build out its capacity, boost its digital
prowess, and enhance its supply chain (with capital expenditures set to hit 7%-8% of sales this year,
about 200-300 basis points north of its historic average) to ensure agility as it contends with
macroeconomic and competitive headwinds.
To be sure, cost pressures (particularly for sugar and cocoa) have yet to abate, with management still
calling for high-single-digit inflation this year. Despite this, Hershey eked out 130 and 70 basis points of
expansion at the adjusted gross and operating margin lines to 45.2% and 22.9%, respectively. And we
surmise Hershey will continue to tap multiple levers (raising prices, extracting inefficiencies, and
altering price/packs) to dull inflation’s strain and fuel ongoing investments in its core operations.
When taken together, management held the line on its fiscal 2023 sales guidance at 8% growth but is
now calling for adjusted EPS to come in at the lower end of the range (11%-12% growth), which square
with our 8.1% and 11.2% respective preprint marks. As such, we don’t intend to alter our $192 fair value
estimate (outside of a low-single-digit bump for time value). Even at a premium (about 20% above our
intrinsic valuation), the stock is off about 15% from its peak earlier this spring, and we think investors
should keep an eye on this name.
Hershey Earnings: Sales Soar as Price Hikes Fail to Deter Consumers’ Hunger for Snacks; Shares
Rich Erin Lash, CFA, Sector Director, 27 Apr 2023
Wide-moat Hershey’s mix of leading confectionery and salty snack fare continues to win with
consumers, as evidenced by its 12% increase in first-quarter organic sales (a 9% benefit from price and
around 3% volume growth). This mark is even more impressive when juxtaposed with the 11.5% gains
posted a year ago.
But management isn’t just filling its coffers. Rather, we’re encouraged by Hershey’s unwavering
commitment to invest in its brands (advertising spending was up nearly 9% in the quarter); we forecast
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Hershey will judiciously expend a high-single-digit percentage of sales toward research, development,
and marketing annually. Investments to enhance its capabilities and build out its capacity (with capital
expenditures set to hit 7%-8% of sales this year, about 200-300 basis points north of its historic average)
also strike us as prudent. Beyond this, Hershey recently announced the acquisition of two popcorn
manufacturing facilities for $164 million, which we see as another tack to ensure it is equipped to meet
demand; we don’t believe it will be left with underutilized domestic assets in a more tempered demand
climate. In our view, investments in its supply chain, manufacturing network, and distribution
capabilities are vital to facilitate agility in its response to impending economic and competitive
headwinds.
Despite just three months complete, management bumped up its fiscal 2023 sales guidance, to 8%
growth (from 6%-8% prior) while narrowing its adjusted EPS range to $9.29-$9.40 (from $9.42 at the
high end). While we intend to edge up our near-term sales projections, we don’t expect to materially
change our long-term outlook (nearly 4% annual sales growth and operating margins holding in the low
20s through fiscal 2032). When taken with the time value of money, our $180 fair value estimate should
rise by a mid-single-digit percentage. However, we don’t think investors should crave shares, which
trade at a more than 40% premium to our intrinsic valuation.
Hershey Has Cemented Its Edge in the U.S. Confection Aisle, but Shares Far From Sweet Erin Lash,
CFA, Sector Director, 23 Mar 2023
Wide-moat Hershey’s competitive prowess was on full display during its latest investor day in Hershey,
Pennsylvania. But despite its recent success (boasting mid-single-digit annual sales growth and 200
basis points of operating margin expansion to 23% since CEO Michele Buck took the helm in 2017),
management seems intent to charge ahead, prioritizing investments to enhance its capabilities and
brand standing through stepped-up innovation, marketing, and distribution. This should ensure its fare
wins with consumers and its entrenched retail standing doesn't waver. Even so, we view shares as
quite rich, trading at a 35% premium to our $180 fair value estimate (which remains in place),
underpinned by our expectations for 3.9% average annual sales growth in the long term (at the high end
of management’s 2%-4% target), against operating margins that hold in the low-20s through fiscal
2032.
While Hershey remains the undisputed leader in the U.S. confection segment, boasting 31% share
(including 45% in chocolate, per IRI), it expanded its palate over the past five years to include a taste for
"salty" (with the addition of Skinny Pop—approaching $500 million in annual sales—and Dot’s, which
generates about $335 million sales a year). However, we don’t posit that this signals Hershey is taking
its eye off core franchises. We see Reese’s (a $3 billion brand that has grown volumes 20% since fiscal
2017) as integral to the business, with the firm expanding capacity for this brand by 60% over the past
five years. From our vantage point, its recently acquired salty fare complements its sweet standing and
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unlocks potential for innovation that blends the two taste profiles, which Hershey is uniquely positioned
to achieve. And to ensure this work hits the mark, the company is calling for a double-digit bump in
advertising in the year ahead; we forecast Hershey will judiciously expend a high-single-digit
percentage of sales toward research, development, and marketing annually.
Hershey's Marks Strike a Sweet Note, but We Think Investors Should Refrain From Indulging in
Shares Erin Lash, CFA, Sector Director, 2 Feb 2023
The resilience of wide-moat Hershey’s stout brand mix and the prudence of its strategic course were
again on display in the fourth quarter. Organic sales popped 10.7% on the heels of an 8.5% benefit from
higher prices and a 2.2% contribution from increased volumes and favorable mix. And despite persistent
inflation, Hershey’s efforts to raise prices and extract inefficiencies resulted in a 20-basis-point increase
in adjusted gross margin to 43.7%. But we don’t surmise management is content to rest on its laurels,
as it plans to beef up investments to enhance its capabilities, integrate its recent salty snack
acquisitions, build out capacity for its core confection brands, and support its brand reach—judicious
spending from our vantage point. In this context, Hershey is targeting $800 million to $900 million in
capital expenditures in fiscal 2023 (which equates to 7.5%-8% of sales), far outpacing the 4%-5% of
sales that it has historically spent. Further, the firm is calling for a double-digit bump in advertising in
the year ahead; our long-term forecast calls for Hershey to expend a high-single-digit percentage of
sales toward research, development, and marketing annually to ensure it remains entrenched with its
retail partners and that its brands stand out at the shelf.
Against this backdrop, Hershey expects to chalk up 6%-8% sales growth (on top of 12% on an organic
basis in fiscal 2022) and $9.29-$9.42 in adjusted EPS. These aims outpace our preprint expectations (3%
and $8.39), which we intend to move to within the targeted ranges, though we see little to warrant
altering our long-term outlook (3%-4% sales growth and operating margins that approach 23% by the
end of our 10-year explicit forecast). When combined with a time value benefit, this should lift our $169
fair value estimate by a low- to mid-single-digit percentage. Despite this, we think investors should
exercise restraint, with shares trading at a 30%-40% premium to our intrinsic valuation.
Hershey's Sweet Fare Remains the Rage, Even as Cost Pressures Prove Unrelenting; Shares Rich
Erin Lash, CFA, Sector Director, 4 Nov 2022
While consumers are facing mounting costs in a number of facets of their lives, this has yet to tame
their appetite for confectionery and snacking fare, as evidenced by Hershey’s stellar third-quarter top-
line marks. Organic sales popped nearly 12% (reflecting almost 8% higher prices and around a 4%
benefit from increased volumes and favorable mix), with growth across its domestic confectionery (up
10.7% organically) and salty snacks (21.5%) lineup. We see this as a byproduct of Hershey’s unwavering
commitment to invest to support its business long term.
ß
For one, advertising and consumer spend was up at a mid-single-digit clip in the quarter, and we
forecast Hershey will expend a high-single-digit percent of sales on average annually ($800 million) on
research, development, and marketing over our explicit forecast. In addition, to overcome capacity
constraints, Hershey intends to direct $600 million toward capital expenditures in fiscal 2022 (about 6%
of sales, 150 basis points north of its historic average), and we think outsize levels of fixed asset
investment are likely to persist (particularly as Hershey integrates its recent salty snack deals, which up
until now have operated independently). As such, we forecast the firm will allocate 5%-6% of sales
toward capital expenditures the next several years. While this could crimp profits further (adjusted
operating margins were down 130 basis points to 22.6%), we think these efforts stand to defend its
wide moat.
With three quarters in the books, management bumped up its full-year outlook to 14%-15% reported
sales growth (from 12%-14%) and adjusted EPS of $8.20-$8.27 (from $8.05-$8.20). We intend to fine-
tune our near-term outlook, which, combined with time value, will likely lead to a low-single-digit bump
to our $165 fair value estimate. Even with this, we still view shares as rich, trading at a 30%-40%
premium to our intrinsic valuation (nearly 30 times earnings) and suggest investors refrain from
indulging. K
ß
Competitors Price vs. Fair Value
Conagra Brands Inc CAG
Fair Value: 33.00

26 Oct 2023 22:41, UTC
40
Last Close: 28.36
30 Over Valued
Under Valued
20
10
0
Analytics
2018 2019 2020 2021 2022 YTD
0.62 1.05 1.04 0.81 0.90 0.86 Price/Fair Value
-41.04 64.28 8.56 -2.58 17.09 -23.20 Total Return %
Morningstar Rating
Total Return % as of 20 Dec 2023. Last Close as of 20 Dec 2023. Fair Value as of 26 Oct 2023 22:41, UTC.
Mondelez International Inc Class A MDLZ
Fair Value: 73.00

2 Nov 2023 19:42, UTC
200
Last Close: 69.33
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD Analytics
0.77 1.06 1.08 1.11 1.01 0.95 Price/Fair Value

-4.23 40.32 8.33 15.68 2.73 5.81 Total Return %
Morningstar Rating
Total Return % as of 20 Dec 2023. Last Close as of 20 Dec 2023. Fair Value as of 2 Nov 2023 19:42, UTC.
ß
Nestle SA NESN
Fair Value: 116.00

8 May 2023 09:29, UTC
200
Last Close: 96.58
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD Analytics
0.99 1.19 1.11 1.29 0.98 0.83 Price/Fair Value

-1.97 34.37 2.08 23.95 -14.50 -7.10 Total Return %
Morningstar Rating
Total Return % as of 20 Dec 2023. Last Close as of 20 Dec 2023. Fair Value as of 8 May 2023 09:29, UTC.
ß
Morningstar Historical Summary

Financials as of 30 Sep 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
Revenue (USD Bil) 7.15 7.42 7.39 7.44 7.52 7.79 7.99 8.15 8.97 10.42 8.51 11.16
Revenue Growth % 7.6 3.9 -0.5 0.7 1.0 3.7 2.5 2.1 10.1 16.1 9.5 10.6
EBITDA (USD Mil) 1,544 1,605 1,228 1,493 1,473 1,852 1,824 1,943 2,242 2,436 2,277 2,776
EBITDA Margin % 21.6 21.6 16.6 20.1 19.6 23.8 22.8 23.8 25.0 23.4 26.8 24.9
Operating Income (USD Mil) 1,357 1,438 1,413 1,278 1,570 1,700 1,717 1,810 2,047 2,263 2,081 2,617
Operating Margin % 19.0 19.4 19.1 17.2 20.9 21.8 21.5 22.2 22.8 21.7 24.5 23.5
Net Income (USD Mil) 820 847 513 720 783 1,178 1,150 1,279 1,478 1,645 1,513 1,909
Net Margin % 11.5 11.4 6.9 9.7 10.4 15.1 14.4 15.7 16.5 15.8 17.8 17.1
Diluted Shares Outstanding (Mil) 227 225 221 215 214 211 211 209 208 207 206 206
Diluted Earnings Per Share (USD) 3.61 3.77 2.32 3.34 3.66 5.58 5.46 6.11 7.11 7.96 7.36 9.28
Dividends Per Share (USD) 1.81 2.04 2.24 2.40 2.55 2.76 2.99 3.15 3.41 3.87 3.26 4.30
Valuation as of 30 Nov 2023

Years 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Price/Sales 3.2 3.2 2.6 3.0 3.2 2.9 3.9 4.0 4.6 4.7 3.8 3.5
Price/Earnings 28.2 28.2 39.5 27.5 33.9 22.1 24.3 26.7 28.1 30.2 23.0 20.2
Price/Cash Flow 19.8 24.6 19.1 21.5 21.0 14.9 18.2 17.1 20.1 21.4 18.2 16.6
Dividend Yield % 1.86 1.96 2.5 2.32 2.24 2.57 2.03 2.07 1.76 1.67 2.15 2.37
Price/Book 16.3 14.9 21.8 24.5 29.1 18.2 17.5 15.4 15.8 15.4 11.1 9.7
EV/EBITDA 14.9 15.5 17.7 16.6 18.2 14.2 19.3 18.4 19.6 21.5 0.0 0.0
Operating Performance / Profitability as of 30 Sep 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
ROA % 16.2 15.4 9.4 13.3 14.1 17.8 14.5 14.8 15.1 15.4 — 16.8
ROE % 62.1 55.4 41.8 80.7 92.1 101 73.3 64.4 59.2 54.3 — 54.2
ROIC % 27.0 25.0 15.9 21.7 22.4 26.7 21.0 21.2 20.8 21.3 — 23.3
Asset Turnover 1.4 1.4 1.3 1.4 1.4 1.2 1.0 0.9 0.9 1.0 — 1.0
Financial Leverage
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Debt/Capital % 52.8 51.5 60.9 74.9 69.3 69.9 68.1 65.7 61.5 52.4 52.4 —
Equity/Assets % 30.0 25.9 18.7 14.2 16.5 18.2 21.4 24.5 26.5 30.1 33.2 —
Total Debt/EBITDA 1.3 1.4 2.0 2.0 2.0 2.4 2.5 2.5 2.4 2.1 2.3 —
EBITDA/Interest Expense 16.9 18.3 15.2 16.2 14.7 12.6 12.0 12.7 17.3 17.4 18.7 17.6
Morningstar Analyst Historical/Forecast Summary as of 10 Nov 2023

Financials Estimates Forward Valuation Estimates
2021 2022 2023 2024 2025
Fiscal Year, ends 31 Dec 2022 2021 2022 2023 2024 2025
Price/Sales 4.4 4.6 3.3 3.1 3.0
Revenue (USD Mil) 8,971 10,419 11,263 11,965 12,435 Price/Earnings 26.9 27.2 18.9 17.7 17.1
Revenue Growth % 10.1 16.1 8.1 6.2 3.9 Price/Cash Flow — — — — —
EBITDA (USD Mil) 2,369 2,784 3,007 3,171 3,246 Dividend Yield % 1.8 1.7 2.4 2.5 2.7
EBITDA Margin % 26.4 26.7 26.7 26.5 26.1 Price/Book 14.6 14.5 11.1 10.1 9.3
EV/EBITDA 18.5 18.8 13.8 13.1 12.8
Operating Income (USD Mil) 2,054 2,405 2,590 2,703 2,732
Operating Margin % 22.9 23.1 23.0 22.6 22.0
Net Income (USD Mil) 1,493 1,761 1,938 2,037 2,069
Net Margin % 16.6 16.9 17.2 17.0 16.6
Diluted Shares Outstanding (Mil) 208 207 204 200 197
Diluted Earnings Per Share(USD) 7.19 8.52 9.49 10.17 10.51
Dividends Per Share(USD) 3.41 3.87 4.30 4.52 4.79
ß
ESG Risk Rating Breakdown
Values
Exposure Subject Subindustry (55.0) u Exposure represents a company’s vulnerability to ESG
Company Exposure 1
53.1 risks driven by their business model
53.1
u Exposure is assessed at the Subindustry level and then
– Manageable Risk 49.3 Medium
2 0 55+ specified at the company level
Unmanageable Risk 3.8 u Scoring ranges from 0-55+ with categories of low, me-
Low Medium High
dium, and high-risk exposure
Management Values u Management measures a company ’s ability to manage

Manageable Risk 49.3 ESG risks through its commitments and actions
63.1%
– Managed Risk3 31.1 Strong
u Management assesses a company's efficiency on ESG
Management Gap4 18.2 100 0 programs, practices, and policies

Strong Average Weak u Management score ranges from 0-100% showing how
Overall Unmanaged Risk 22.0 much manageable risk a company is managing
ESG Risk Rating ESG Risk Rating Assessment5

22.02
Medium
Negligible Low Medium High Severe ESG Risk Rating is of Dec 06, 2023. Highest Controversy Level is as of Dec 08,
2023. Sustainalytics Subindustry: Packaged Foods. Sustainalytics provides
ESG Risk Ratings measure the degree to which a company’s value is impacted by environmental, social, and governance Morningstar with company ESG ratings and metrics on a monthly basis and
risks, by evaluating the company’s ability to manage the ESG risks it faces. as such, the ratings in Morningstar may not necessarily reflect current
Sustainalytics’ scores for the company. For the most up to date rating and
1. A company's Exposure to material ESG issues 2. Unmanageable Risk refers to risks that are inherent to a particular business model that cannot be managed by more information, please visit: sustainalytics.com/esg-ratings/.
programs or initiatives 3. Managed Risk = Manageable Risk multiplied by a Management score of 63.1% 4. Management Gap assesses risks that are not
managed, but are considered manageable 5. ESG Risk Rating Assessment = Overall Unmanaged Risk = Management Gap plus Unmanageable Risk
Peer Analysis 06 Dec 2023 Peers are selected from the company's Sustainalytics-defined Subindustry and are displayed based on the closest market cap values
Company Name Exposure Management ESG Risk Rating
The Hershey Co 53.1 | Medium 0 55+ 63.1 | Strong 100 0 22.0 | Medium 0 40+
Mondelez International Inc 54.7 | Medium 0 55+ 63.2 | Strong 100 0 22.6 | Medium 0 40+
McCormick & Co Inc 52.8 | Medium 0 55+ 52.5 | Strong 100 0 27.0 | Medium 0 40+
Conagra Brands Inc 56.0 | High 0 55+ 51.5 | Strong 100 0 29.2 | Medium 0 40+
Nestle SA 54.9 | Medium 0 55+ 54.3 | Strong 100 0 27.2 | Medium 0 40+
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Appendix
Historical Morningstar Rating
December
The Hershey November
Co HSY 20 Dec October
2023 22:21, UTC September August July May May April March February January
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
QQQ QQQ QQQ QQ QQ QQ Q Q Q Q Q Q
Q Q Q Q Q Q Q Q Q Q Q Q
QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ
QQ QQ QQQ QQQ QQ QQQ QQQ QQQ QQQ QQQ QQ QQ
QQ QQ QQ QQ QQ QQ QQQ QQQ QQQ QQQ QQQ QQQ
QQQ QQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQ
December
Conagra Brands NovemberOctober
Inc CAG 20 Dec 2023 22:21, September
UTC August July May May April March February January
QQQQ QQQQ QQQQ QQQQQ QQQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ
QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ
QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQ QQQ QQQ
QQQ QQQ QQQ QQQ QQ QQ QQQ QQQ QQQ QQQQ QQQQ QQQ
QQQ QQQQ QQQQ QQQ QQQ - QQQQ QQQQ QQQQ QQQQ QQQQQ QQQQQ
QQQQQ QQQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQ QQ
December
Mondelez International November
Inc October
Class A MDLZ September
20 Dec 2023 22:21, August
UTC July May May April March February January
QQQ QQQ QQQQ QQQ QQQ QQQ QQ QQ QQ QQQ QQQ QQQ
QQQ QQQ QQQQ QQQQ QQQ QQQ QQQ QQQ QQQ QQQ QQ QQ
QQQ QQQ QQQ QQQ QQQ QQ QQQ QQQ QQQ QQQ QQQ QQQ
QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQ
QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQQ
QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ
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December
Nestle SA NESN November
20 Dec 2023 October
18:06, UTC September August July May May April March February January
QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQ QQQ QQQ QQQ QQQ
QQQ QQQ QQQ QQQ QQ QQ QQQ QQ QQ QQ QQ QQ
Q QQ QQ QQ QQ QQ QQ QQ QQ QQ QQQ QQ
QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ
QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQQ
QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ
ß
Alternative location for disclosure can be found https:// our fair value estimates. An economic moat is a structural workingcapital accounts, and capital spending. Based on
pspdf-stg.morningstar.com/v1/disclosure feature that allows a firm to sustain excess profits over a these projections, we calculate earnings before interest,
long period of time. We define economic profits as re- after taxes (EBI) and the net new investment (NNI) to de-
Overview turns on invested capital (or ROIC) over and above our es- rive our annual free cash flow forecast.
At the heart of our valuation system is a detailed projec- timate of a firm’s cost of capital, or weighted average
tion of a company ’s future cash flows, resulting from our Stage II: Fade
cost of capital (or WACC). Without a moat, profits are
analysts’ research. Analysts create custom industry and The second stage of our model is the period it will take
more susceptible to competition. We have identified five
company assumptions to feed income statement, balance the company ’s return on new invested capital—the re-
sources of economic moats: intangible assets, switching
sheet, and capital investment assumptions into our glob- turn on capital of the next dollar invested (“RONIC”)—to
costs, network effect, cost advantage, and efficient scale.
ally standardized, proprietary discounted cash flow, or decline (or rise) to its cost of capital. During the Stage II
DCF, modeling templates. We use scenario analysis, inde- Companies with a narrow moat are those we believe are period, we use a formula to approximate cash flows in
pth competitive advantage analysis, and a variety of other more likely than not to achieve normalized excess returns lieu of explicitly modeling the income statement, balance
analytical tools to augment this process. Moreover, we for at least the next 10 years. Wide-moat companies are sheet, and cash flow statement as we do in Stage I. The
think analyzing valuation through discounted cash flows those in which we have very high confidence that excess length of the second stage depends on the strength of
presents a better lens for viewing cyclical companies, returns will remain for 10 years, with excess returns more the company’s economic moat. We forecast this period to
high-growth firms, businesses with finite lives (e.g., likely than not to remain for at least 20 years. The longer last anywhere from one year (for companies with no eco-
mines), or companies expected to generate negative a firm generates economic profits, the higher its intrinsic nomic moat) to 10–15 years or more (for wide-moat com-
earnings over the next few years. That said, we don’t dis- value. We believe low-quality, no-moat companies will panies). During this period, cash flows are forecast using
miss multiples altogether but rather use them as support- see their normalized returns gravitate toward the firm’s four assumptions: an average growth rate for EBI over the
ing cross-checks for our DCF-based fair value estimates. cost of capital more quickly than companies with moats. period, a normalized investment rate, average return on
We also acknowledge that DCF models offer their own new invested capital (RONIC), and the number of years
challenges (including a potential proliferation of estim- When considering a company's moat, we also assess until perpetuity, when excess returns cease. The invest-
ated inputs and the possibility that the method may miss whether there is a substantial threat of value destruction, ment rate and return on new invested capital decline un-
shortterm market-price movements), but we believe these stemming from risks related to ESG, industry disruption, til a perpetuity value is calculated. In the case of firms
negatives are mitigated by deep analysis and our financial health, or other idiosyncratic issues. In this con- that do not earn their cost of capital, we assume marginal
longterm approach. text, a risk is considered potentially value destructive if its ROICs rise to the firm’s cost of capital (usually attribut-
occurrence would eliminate a firm’s economic profit on a able to less reinvestment), and we may truncate the
Morningstar’s equity research group (” we,” “our”) be- cumulative or midcycle basis. If we deem the probability second stage.
lieves that a company’s intrinsic worth results from the of occurrence sufficiently high, we would not characterize
future cash flows it can generate. The Morningstar Rating the company as possessing an economic moat. Stage III: Perpetuity
for stocks identifies stocks trading at a discount or premi- Once a company’s marginal ROIC hits its cost of capital,
um to their intrinsic worth—or fair value estimate, in 2. Estimated Fair Value we calculate a continuing value, using a standard per-
Morningstar terminology. Five-star stocks sell for the Combining our analysts’ financial forecasts with the petuity formula. At perpetuity, we assume that any
biggest risk adjusted discount to their fair values, where- firm’s economic moat helps us assess how long returns growth or decline or investment in the business neither
as 1-star stocks trade at premiums to their intrinsic worth. on invested capital are likely to exceed the firm’s cost of creates nor destroys value and that any new investment
capital. Returns of firms with a wide economic moat rat- provides a return in line with estimated WACC.
Four key components drive the Morningstar rating: (1) our ing are assumed to fade to the perpetuity period over a
assessment of the firm’s economic moat, (2) our estimate longer period of time than the returns of narrow-moat Because a dollar earned today is worth more than a dollar
of the stock’s fair value, (3) our uncertainty around that firms, and both will fade slower than no-moat firms, in- earned tomorrow, we discount our projections of cash
fair value estimate and (4) the current market price. This creasing our estimate of their intrinsic value. flows in stages I, II, and III to arrive at a total present
process ultimately culminates in our singlepoint star rat- value of expected future cash flows. Because we are
ing. Our model is divided into three distinct stages: modeling free cash flow to the firm—representing cash
available to provide a return to all capital providers—we
1. Economic Moat discount future cash flows using the WACC, which is a
Stage I: Explicit Forecast
The concept of an economic moat plays a vital role not weighted average of the costs of equity, debt, and pre-
In this stage, which can last five to 10 years, analysts
only in our qualitative assessment of a firm’s long-term ferred stock (and any other funding sources), using ex-
make full financial statement forecasts, including items
investment potential, but also in the actual calculation of pected future proportionate long-term, market-value
such as revenue, profit margins, tax rates, changes in
weights.
Morningstar Equity Research Star Rating Methodology

3. Uncertainty Around That Fair Value Estimate
Morningstar’s Uncertainty Rating is designed to capture
the range of potential outcomes for a company ’s intrinsic
value. This rating is used to assign the margin of safety
required before investing, which in turn explicitly drives
our stock star rating system. The Uncertainty Rating is
aimed at identifying the confidence we should have in as-
signing a fair value estimate for a given stock.
ß
Our Uncertainty Rating is meant to take into account any- Morningstar Equity Research Star Rating Methodology
thing that can increase the potential dispersion of future
outcomes for the intrinsic value of a company, and any-
thing that can affect our ability to accurately predict
these outcomes. The rating begins with a suggested rat-
ing produced by a quantitative process based on the trail-
ing 12-month standard deviation of daily stock returns.
An analyst overlay is then applied, with analysts using
the suggested rating, historical rating data, and their own
knowledge of the company to inform them as they make
the final Uncertainty Rating decision. Ultimately, the rat-
ing decision rests with the analyst. Analysts take into ac-
count many characteristics when making their final de-
cision, including cyclical factors, operational and financial
factors such as leverage, company-specific events, ESG
risks, and anything else that might increase the potential
dispersion of future outcomes and our ability to estimate
those outcomes.
Our recommended margin of safety—the discount to fair

value demanded before we ’ d recommend buying or
selling the stock—widens as our uncertainty of the es-
timated value of the equity increases. The more uncertain
we are about the potential dispersion of outcomes, the
greater the discount we require relative to our estimate of
the value of the firm before we would recommend the https://shareholders.morningstar.com The Morningstar Star Ratings for stocks are defined be-
purchase of the shares. In addition, the Uncertainty Rat- low:
ing provides guidance in portfolio construction based on QQQQQ We believe appreciation beyond a fair risk ad-
Morningstar Star Rating for Stocks
risk tolerance. justed return is highly likely over a multiyear time frame.
Once we determine the fair value estimate of a stock, we
compare it with the stock’s current market price on a Scenario analysis developed by our analysts indicates
Our Uncertainty Ratings are: Low, Medium, High, Very
daily basis, and the star rating is automatically re-calcu- that the current market price represents an excessively
High, and Extreme.
lated at the market close on every day the market on pessimistic outlook, limiting downside risk and maximiz-
which the stock is listed is open. Our analysts keep close ing upside potential.
Margin of Safety
tabs on the companies they follow, and, based on thor-
Qualitative Analysis
QRating ough and ongoing analysis, raise or lower their fair value QQQQ We believe appreciation beyond a fair risk-ad-
Uncertainty Ratings QQQQQRating
estimates as warranted. justed return is likely.
Low 20% Discount 25% Premium
Medium 30% Discount 35% Premium QQQ Indicates our belief that investors are likely to re-
Please note, there is no predefined distribution of stars.
High 40% Discount 55% Premium ceive a fair risk-adjusted return (approximately cost of
That is, the percentage of stocks that earn 5 stars can
Very High 50% Discount 75% Premium equity).
fluctuate daily, so the star ratings, in the aggregate, can
Extreme 75% Discount 300% Premium
serve as a gauge of the broader market’s valuation. When
there are many 5-star stocks, the stock market as a whole QQ We believe investors are likely to receive a less than
Our uncertainty rating is based on the interquartile range, fair risk-adjusted return.
is more undervalued, in our opinion, than when very few
or the middle 50% of potential outcomes, covering the
companies garner our highest rating.
25th percentile–75th percentile. This means that when a Q Indicates a high probability of undesirable risk-adjus-
stock hits 5 stars, we expect there is a 75% chance that ted returns from the current market price over a multiyear
We expect that if our base-case assumptions are true the
the intrinsic value of that stock lies above the current time frame, based on our analysis. Scenario analysis by
market price will converge on our fair value estimate over
market price. Similarly, when a stock hits 1 star, we ex- our analysts indicates that the market is pricing in an ex-
time generally within three years (although it is im-
pect there is a 75% chance that the intrinsic value of that cessively optimistic outlook, limiting upside potential and
possible to predict the exact time frame in which market
stock lies below the current market price. leaving the investor exposed to Capital loss.
prices may adjust).
4. Market Price Other Definitions

Our star ratings are guideposts to a broad audience and
The market prices used in this analysis and noted in the individuals must consider their own specific investment Last Price: Price of the stock as of the close of the mar-
report come from exchange on which the stock is listed goals, risk tolerance, tax situation, time horizon, income ket of the last trading day before date of the report.
which we believe is a reliable source. needs, and complete investment portfolio, among other
factors. Capital Allocation Rating: Our Capital Allocation (or
For more details about our methodology, please go to Stewardship) Rating represents our assessment of the
ß
quality of management’s capital allocation, with particu- other words, ESG Risk Ratings measures a company’s un- any specific recipient. This publication is intended to
lar emphasis on the firm ’s balance sheet, investments, managed ESG Risks represented as a quantitative score. provide information to assist investors in making their
and shareholder distributions. Analysts consider compan- Unmanaged Risk is measured on an open-ended scale own investment decisions, not to provide investment ad-
ies’ investment strategy and valuation, balance sheet starting at zero (no risk) with lower scores representing vice to any specific investor. Therefore, investments dis-
management, and dividend and share buyback policies. less unmanaged risk and, for 95% of cases, the unman- cussed herein may not be suitable for all investors; in-
Corporate governance factors are only considered if they aged ESG Risk score is below 50. vestors must exercise their own independent judgment as
are likely to materially impact shareholder value, though to the suitability of such investments and recommenda-
either the balance sheet, investment, or shareholder dis- Based on their quantitative scores, companies are tions in the light of their own investment objectives, ex-
tributions. Analysts assign one of three ratings: "Exem- grouped into one of five Risk Categories (negligible, low, perience, taxation status and financial position. Morning-
plary", "Standard", or "Poor". Analysts judge Capital Alloc- medium, high, severe). These risk categories are absolute, star encourages Report recipients to read all relevant is-
ation from an equity holder’s perspective. Ratings are de- meaning that a ‘high risk’ assessment reflects a compar- sue documents (e.g., prospectus) pertaining to the secur-
termined on a forward looking and absolute basis. The able degree of unmanaged ESG risk across all subindus- ity concerned, including without limitation, information
Standard rating is most common as most managers will tries covered. relevant to its investment objectives, risks, and costs be-
exhibit neither exceptionally strong nor poor capital alloc- fore making an investment decision and when deemed
ation. The ESG Risk Rating Assessment is a visual representa- necessary, to seek the advice of a financial, legal, tax,
tion of Sustainalytics ESG Risk Categories on a 1 to 5 and/or accounting professional. The information, data,
Capital Allocation (or Stewardship) analysis published pri- scale. Companies with Negligible Risk = 5 Globes, Low analyses and opinions presented herein are not warran-
or to Dec. 9, 2020, was determined using a different pro- Risk = 4, Medium Risk = 3 Globes, High Risk = 2 Globes, ted to be accurate, correct, complete or timely. Unless
cess. Beyond investment strategy, financial leverage, and Severe Risk = 1 Globe. For more information, please visit otherwise provided in a separate agreement, neither
dividend and share buyback policies, analysts also con- sustainalytics.com/esg-ratings/ Morningstar, Inc. or the Equity Research Group repres-
sidered execution, compensation, related party transac- ents that the report contents meet all of the presentation
tions, and accounting practices in the rating. Ratings should not be used as the sole basis in evaluating and/or disclosure standards applicable in the jurisdiction
a company or security. Ratings involve unknown risks and the recipient is located.
Capital Allocation Rating: Our Capital Allocation (or uncertainties which may cause our expectations not to
Stewardship) Rating represents our assessment of the occur or to differ significantly from what was expected Except as otherwise required by law or provided for in a
quality of management’s capital allocation, with particu- and should not be considered an offer or solicitation to separate agreement, the analyst, Morningstar, Inc. and
lar emphasis on the firm ’s balance sheet, investments, buy or sell a security. the Equity Research Group and their officers, directors
and shareholder distributions. Analysts consider compan- and employees shall not be responsible or liable for any
ies’ investment strategy and valuation, balance sheet Risk Warning trading decisions, damages or other losses resulting from,
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Corporate governance factors are only considered if they market and other risks and there is no assurance or guar- within the report.
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Morningstar Equity Analyst Report | Report as of 21 Dec 2023 00:58, UTC | Reporting Currency: USD | Trading Currency: USD

| Exchange: NEW YORK STOCK EXCHANGE, INC. Page 1 of 22

The Hershey Co HSY QQQQ 20 Dec 2023 22:21, UTC

Price vs. Fair Value

Fair Value: 197.00

The Hershey Co HSY QQQQ 20 Dec 2023 22:21, UTC

Bears Say Erin Lash, CFA, Sector Director, 10 Nov 2023

Economic Moat Erin Lash, CFA, Sector Director, 10 Nov 2023

The Hershey Co HSY QQQQ 20 Dec 2023 22:21, UTC

Fair Value Fair Value Fair Value Fair Value

Last Close Last Close

The Hershey Co HSY QQQQ 20 Dec 2023 22:21, UTC

The Hershey Co HSY QQQQ 20 Dec 2023 22:21, UTC

The Hershey Co HSY QQQQ 20 Dec 2023 22:21, UTC

view its risk from ESG issues as low.

Capital Allocation Erin Lash, CFA, Sector Director, 10 Nov 2023

The Hershey Co HSY QQQQ 20 Dec 2023 22:21, UTC

Analyst Notes Archive

The Hershey Co HSY QQQQ 20 Dec 2023 22:21, UTC

The Hershey Co HSY QQQQ 20 Dec 2023 22:21, UTC

The Hershey Co HSY QQQQ 20 Dec 2023 22:21, UTC

The Hershey Co HSY QQQQ 20 Dec 2023 22:21, UTC

The Hershey Co HSY QQQQ 20 Dec 2023 22:21, UTC

Competitors Price vs. Fair Value

Conagra Brands Inc CAG

Fair Value: 33.00

Mondelez International Inc Class A MDLZ

Fair Value: 73.00

0.77 1.06 1.08 1.11 1.01 0.95 Price/Fair Value

The Hershey Co HSY QQQQ 20 Dec 2023 22:21, UTC

Fair Value: 116.00

0.99 1.19 1.11 1.29 0.98 0.83 Price/Fair Value

The Hershey Co HSY QQQQ 20 Dec 2023 22:21, UTC

Morningstar Historical Summary

Valuation as of 30 Nov 2023

Morningstar Analyst Historical/Forecast Summary as of 10 Nov 2023

The Hershey Co HSY QQQQ 20 Dec 2023 22:21, UTC

ESG Risk Rating Breakdown

Management Values u Management measures a company ’s ability to manage

Management Gap4 18.2 100 0 programs, practices, and policies

Overall Unmanaged Risk 22.0 much manageable risk a company is managing

ESG Risk Rating ESG Risk Rating Assessment5

Research Methodology for Valuing Companies

Morningstar Equity Research Star Rating Methodology

Research Methodology for Valuing Companies

Our recommended margin of safety—the discount to fair

4. Market Price Other Definitions

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

India # The Conflicts of Interest disclosure above also ap-

For recipients in Japan: The Report is distributed by Ib-

For recipients in Singapore: For Institutional Investor

For recipients in Korea: The report is distributed by

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