Hershey Co. This is the name of my company: Hershey Co. Firm Financial Analysis Report Due date April 25th, 2018 at 11:59 pm via Canvas dropbox. I will accept the project through April 29th at 11:59 pm without a late penalty. Firm Selection By Monday April 9th you must submit a list of five Fortune 500 firms for which you would like to perform an in-depth financial analysis. By Wednesday, April 11th, I will assign you one of you five firms for which you are to complete an in-depth financial analysis using the model below. The Basics of a Financial Analysis Report The purpose of a financial analysis report is to present company financial information in a way that is useful and easy to understand. The process of putting an analysis down in writing can be instrumental in making sure as many stones as possible have been turned over when researching a company. At a minimum, financial analysis reports analyze trends and changes in company performance. Most financial analysis reports also incorporate competitor data and compare company performance to industry standards. Below is an overview of the major sections to consider when writing a financial analysis report on a company. For your assigned company, assume you are a stock analyst at an investment firm, and are in charge of providing a recommendation to buy, sell or hold of a stock. Using the overview as a model, please provide this recommendation and include supportive arguments in the form of a paper presentation of at least two pages long. Company Overview A report should start with a description of the company in order to help investors understand the business, its industry, its motivation and any edge it might have over its competitors. These factors can prove invaluable in helping to explain why a company might be a profitable investment or not. A firm’s annual report, 10-K filing or quarterly 10-Q with the Securities and Exchange Commission (SEC) provide ideal starting points; it is surprising how rare it is for industry experts to refer to original company filings for important details. More valuable detail can be obtained from industry trade journals, reports from key rivals and other analyst reports. To also capture key fundamentals to describe a company, look to Michael Porter. The Porter’s Five Forces model helps explain a company’s place within its industry. Specifically, the factors include the threat for new entrants to enter the market, the threat for substitute products or services, the extent to which suppliers are able to influence the company and the intensity of rivalry among existing competitors. Investment Thesis The motivation for a bullish or bearish stance on a company goes into this section. It can come at the top of a report and include parts of a company overview, but regardless of its position, it should cover the key investment positives and negatives. A fundamental analysis, which can also be broken out into its own section, contains research on the firm’s financial statements, such as sales and profit growth trends, cash flow generation strength, debt levels and overall liquidity, and how this compares to the competition. No detail is too small in this section; it can also cover efficiency ratios like the primary components in the cash conversion cycle, turnover ratios and a detailed breakdown of return on equity components, such as the DuPont identity, which will break ROE into three to five different metrics. The most important component of analyzing past trends is to synthesize them into a forecast of the company’s performance. No analyst has a crystal ball, but the best ones are able to accurately extrapolate past trends into the future, or decide which factors are the most important in defining success for a company going forward. Balance Sheet and Income Statement Analyze financial statements to uncover any trends from the previous year. Briefly compare the current year's and previous year's income statement and balance sheet and look for any large changes year to year. After identifying big-ticket items, analyze the income statement and balance sheet using horizontal analysis to identify smaller changes. To perform horizontal analysis, express each account value is as a percentage of the account value in the oldest financial statement. For example, if a business has assets of $500 in 2010 and $750 in 2011, the analyst would list assets as 100 percent in 2010 and 150 percent in 2011. Highlight unusual or significant financial trends in first section of your report. Cash Flow and Equity Although the income statement and balance sheet are the most widely used financial statements, the statements of cash flow and stockholder's equity also provide valuable information. Analyze company cash flow for the past few periods and examine where the company is spending money. Too little cash means the company may have liquidity problems if operations go south. Along with cash, examine changes in equity. Highlight growth or shrinkage in the retained earnings account and mention any significant change in outstanding stock. Common-Sized Statements After analyzing year-over-year changes and trends within the company, shift your focus outward. Use common-sized financial statement to compare company performance with industry competitors. In a commonsized income statement, each account is expressed as a percentage of total revenue. Common-sized balance sheets express each account as a percentage of total assets. Common-size income statements make it easy to compare where companies of different sizes are spending and earning money. Common-sized balance sheets make it easy to compare the relative amount of liability and equity a company maintains. Financial Ratios Financial ratios are another tool that allows readers to easily compare company performance to others in the industry. Focus on financial ratios that are relevant to your audience. For example, creditors and lenders are generally most interested in liquidity and leverage ratios. Efficiency ratios provide helpful information for internal managers while outside investors are often concerned with profitability ratios. Compare the company financial ratios to the industry average to give the reader a sense of how the company is performing. Valuation The most important part of any financial analysis is to come to an independent value for the stock and compare this to the market price. There are three primary valuation techniques: 1. The first, and arguably most fundamental, technique is to estimate a company’s future cash flows and discount them back to the future at an estimated discount rate. This is generally referred to as a discounted cash flow analysis. 2. The second is called relative value, where the fundamental metrics and valuation ratios (price-tosales, price-to-earnings, P/E to growth, etc.) are compared to competitors. Another comparison analysis is to look at what other rivals have been bought out for or the price paid for an acquisition. 3. The third and last technique is to look at book value and try to estimate what a company might be worth if broken up or liquidated. A book value analysis is especially insightful for financial sector stocks, for instance. Key Risks This section can be part of the bull/bear story in the investment thesis, but is meant to detail key factors that may significantly change future cash flows, the subsequent valuation, and subsequently derail either a bullish or bearish stance. The loss of patent protection for a blockbuster drug for a pharmaceutical company is a great example of a factor that can weigh heavily on the valuation for its underlying stock. Other considerations include the sector in which the firm operates. For example, the technology industry is marked by short product life cycles, which can make it hard for a firm to keep its edge following a successful product release. Other Considerations The above sections could prove sufficient, but depending on the stones uncovered during a financial analysis, other new sections might be warranted. Sections covering corporate governance, the political environment or nearer-term news flow, might be worthy of a fuller analysis. Basically, anything important that can impact the future value of a stock should exist somewhere within the report. The Bottom Line Performance of the underlying company is most certainly to drive the performance of its stock or bonds in the future. Other derivative securities, such as futures and options, will also depend on an underlying investment, be it a commodity or a company. Figuring out the key drivers to the performance of a stock and putting it down in writing can be an invaluable endeavor for any investor, regardless of if a formal research report is needed.