© Copyright 2009, Zacks Investment Research. All Rights Reserved.

The Hershey Company (HSY-NYSE) $37.63

Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.

Reason for Report: FLASH UPDATE: HSY, Ferrero mulling joint Cadbury bid

Prev. Ed.: October 28, 2009; 3Q09 Earnings update

Flash Update

On November 17, 2009, media reports said Hershey Co. is in talks with privately held Italian confectionery company Ferrero International SpA to launch a joint bid for Cadbury PLC. British confectioner Cadbury has already rejected a $16.7 billion hostile takeover bid from Kraft Foods (KFT), calling the offer “derisory.” However, the reports said talks between Hershey and the Italian chocolate maker were in a very preliminary stage and it remained unclear if an offer would be made.

A more expanded account of analyst opinions will follow in the next update of HSY.

Portfolio Manager Executive Summary [NOTE: Only highlighted material has been changed]

The Hershey Company (HSY or the Company) is the leading producer of confectionery products in the US, with a domestic market share of approximately 28%. Hershey is well known for chocolate products (Hershey’s, Reese’s, and Kisses), where the Company enjoys a domestic market share of approximately 45%.

While most companies in the packaged food universe are using productivity improvement initiatives and pricing to mitigate the impact of the high input costs, Hershey is on a different track. The Company appears set to increase its market spending, increase expenses for its newly-established C-store salesforce, and enhance its investment for international growth.

In an effort to increase its potential for profitable growth, management embarked on many company-wide programs to divest low-margin brands and implement numerous supply chain cost-reduction initiatives. A major growth driver for Hershey’s has also been the continual expansion of its portfolio of branded products, both through internal development and acquisitions.

November 18, 2009

Research Associate: Sankha Subhra Mitra, MBA.

Editor: Deepa Agarwal, M.Fin, M.Com.

Sr. Ed.: Ian Madsen, CFA; imadsen@zacks.com; Tel: 1-800-767-3771, x9417

www.zackspro.com 111 N. Canal Street, Suite 1101 Chicago, IL 60606

Zacks Research Digest

Zacks Investment Research Page 2 www.zackspro.com

The following is a summarized form of diverse brokerage viewpoints:

Neutral or equivalent outlook (8/15 firms or 53.0%): Target prices range from $37.00-$42.00. The firms with a neutral outlook note that the favorable channel mix, dominant market share, right strategic actions by management, and additional cost reductions through the divestiture of low-margin brands, rationalizing of SKUs, and continuing with the 3-year Global Supply Chain transformation plan, are some of the positives for HSY. In addition, HSY is increasingly better positioned, as its products are inexpensive, impulse oriented, largely US based, and not subject to private label competition. However, these firms believe that poor execution, heightened competition, unfavorable foreign currency exchange rates, increased pension expense, near-term deceleration in the Company’s sales, lower-than-expected contribution from new products, cost inflation, and the need for increases in consumer spending, will pressure HSY’s performance in the foreseeable future. All the firms based their valuation on forward EPS estimates, except one firm, which used EV/EBITDA analysis for valuation.

Negative or equivalent outlook (6/15 firms or 40.0%): Target prices range from $32.00–$38.00. The firms remain cautious on the stock based on the following factors: i) Margins are back at previously unsustainable levels and input cost inflation (cocoa, dairy, sugar, etc.) is likely to accelerate in the coming quarters; ii) Competition from Mars is likely to get more difficult; iii) The stock is trading at a premium compared with its peer group, which is not justified, iv) Volumes are expected to decline going forward particularly as it relates to its seasonal business and v) Promotional spending risk remains around Halloween, Valentine’s Day and Easter seasons. In addition, the firms believe that Hershey is investing heavily in its business in marketing terms and in growth capabilities (U.S. and International) and this will continue to weigh on profitability. The firms used P/E or DCF analysis to derive the target price.

Buy or equivalent outlook (1/15 firms or 7.0%): Target price provided by one firm is $49.00. The bullish firm remains encouraged by Hershey’s strong topline growth momentum and believes that the management team, led by David West, will execute solidly on the Company’s growth strategy with the three-year Global Supply Chain transformation plan. The firm believes that going forward HSY is experiencing significant margin improvement and continues to reinvest a portion of its improvement back into marketing. The firm believes that despite the current headwinds created by a difficult input cost environment, Hershey should continue to generate solid cash flow and EPS growth in the high, single-digit range over the long term, given its leading position in the steady U.S. chocolate market. The firm expects near-term sales growth to be driven by new products and growth of core brands in non-traditional distribution channels. The firm based the valuation on P/E analysis.

October 26, 2009

Recent Events [NOTE: Only highlighted material has been changed]

On October 22, 2009, HSY announced its 3Q09 financial results. Highlights are as follows:

· Net revenues decreased to $1,484.1 million in 3Q09 from $1,489.6 million in 3Q08. · Adjusted EBIT increased 15.3% to $290.6 million in 3Q09 from $251 million in 3Q08. · Adjusted net income was $168.5 million or $0.73 per diluted share in 3Q09 versus $145.8 million or

$0.64 per diluted share in 3Q08.

Zacks Investment Research Page 3 www.zackspro.com

Overview [NOTE: Only highlighted material has been changed]

The Hershey Company (HSY or the Company) manufactures chocolate and non-chocolate confectionery and grocery products. It principally offers confectionery and snacks sold in the form of bar goods, bagged items, and boxed items; refreshment products sold in the form of gum and mints; and grocery products sold in the form of baking ingredients, chocolate drink mixes, peanut butter, and beverages. The Company sells its products primarily to wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, and concessionaires through sales representatives, food brokers, and retail sales merchandisers in the United States, Canada, Mexico, and Brazil. In addition, the Company imports and/or markets selected confectionery products in the Philippines, Japan, and South Korea; and markets confectionery products in approximately 60 countries. The Hershey Company is headquartered in Hershey, Pennsylvania.

The Milton Hershey School Trust controls approximately 78.0% of The Hershey Company's voting shares and is the largest shareholder of HSY.

The firms have identified the following issues as critical for evaluating the investment merits of HSY:

Key Positive Arguments Key Negative ArgumentsLargest Manufacturer: HSY is the largest North American manufacturer of quality chocolate and sugar confectionery products.

Execution Risk: HSY’s entry into the cookies sector puts the Company squarely up against some powerhouse competitors. Hence, its success is by no means assured.

New Product Introductions: HSY’s ability to continue with its innovation plan and introduce new products holds the key to its long-term growth.

Commodity Food Costs: Commodity costs across all food categories have risen substantially over the past year.

International Opportunity: Management is expanding into the international markets, focusing on Mexico, Brazil, Canada, and Asia.

Hershey Trust: The Hershey Trust controls 78% of the voting power at Hershey, thus the Trust’s interests might be in conflict with those of other shareholders. For example, the Trust may prefer diversification to increased dividends.

Expanding Margins: Numerous initiatives involve expanding margins, such as divesting low margin brands, rationalizing SKUs, and implementing numerous supply chain cost-reduction initiatives.

Mature Industry, Less-than-Healthy Product Line: The secular growth rate of the food business is slowing. Some wonder if the confectionery business can outpace the industry, given the trends toward healthier eating habits.

Strong Financial Position: The Company maintains a sound financial position and has a strong cash flow. Strong cash flow allows management to return value to shareholders in the form of share repurchases and dividends.

Competitive Pressures: The Company is facing incremental competition, due to the challenging consumer marketplace and particularly from the acquisition of Wrigley by the privately-held Mars Inc.

Limited Growth: HSY’s growth could be limited by its too much dependence on its domestic market. Currency Risk: HSY is exposed to currency risk as the Company invests in international markets,

HSY’s website is: http://www.hersheys.com.

Note: HSY’s fiscal year ends on December 31. October 26, 2009

Zacks Investment Research Page 4 www.zackspro.com

Revenue [NOTE: Only highlighted material has been changed]

The Company reported 3Q09 sales of $1,484.1 million versus $1,489.6 million in 3Q08, down 0.4% y/y, as 10%-11% higher prices was offset by lower volume, the discontinuation of Starbucks and Cacao Reserve, and the unfavorable foreign currency exchange rates. According to the Zacks Digest, in 3Q09, sales decreased 0.4% to $1,484.0 million from $1,489.8 million in 3Q08.

U.S. retail takeaway, in channels that account for over 80% of retail business (i.e., food, drugs, mass, convenience, and Wal-Mart) was up 4.8% y/y in 3Q09. The improvement in HSY’s retail takeaways is largely driven by 1) the mainstream, core brands (e.g., Reese’s, Hershey’s, Kit-Kat, and Twizzlers) as sales trends in the premium, gifting, and novelties segments remains lackluster; 2) strong sales growth in non-measured channels, including Wal-Mart as non-measured sales likely increased at 6%-7% relative to 2.7% growth in retail takeaways in the measured channels; and 3) material increase in advertizing.

HSY’s Convenience store (c- stores) results were particularly strong with retail takeaway up 5.8% y/y compared with category growth of 3.8%, which resulted in a market share gain of 0.5% y/y. Specifically, HSY posted strong retail sales growth of 7.3% in chocolate and 9.3% in non-chocolate segments in c-stores owing to price realization, increased distribution of king size bars, and strong in-store selling and merchandising. HSY’s refreshment takeaways in the c-store channel remain weak.

HSY’s US market share in measured channels remained flat during the quarter and improved 0.3% y/y in the first nine months of FY09, due to market share gains in core chocolate and confectionary sugar.

International sales declined 1% y/y in 3Q09 but remained positive on constant currency basis as 1) sales increased double digits in Brazil; 2) confectionary sales increased modestly in Canada and India; and 3) beverage sales declined in Mexico and India.

Outlook

Based on the year-to-date price/volume elasticity trends and brand-building and marketplace initiatives for the remainder of FY09, the Company expects 2009 net sales to grow within 3% and 5% long-term objective. This sales growth reflects expectations for a more modest pricing benefit in 4Q09 due to a compressed Halloween season (owing to the late Labor Day) and shift in a large portion of Valentine’s Day and Easter shipments from December to January. Over the balance of FY09, HSY is accelerating domestic and international investments in consumer capabilities, customer insights and category management techniques that will benefit the Company over the long term.

For FY10, management assumes that the economic environment for consumers in the U.S. and international markets will continue to be challenging. Hence, the Company will continue to focus on and make appropriate investments in core brands and expects 2010 net sales growth to be within 3 to 5% of its long-term objective.

One firm (Stifel Nicolaus) estimates sales growth of over 4% in FY10, which is in line with the Company's guidance range of 3%-5% sales growth for FY10 with over 1% benefit from improved FX rates.

Another firm (Barclays Capital) expects sales growth of 2.5% in 4Q09, based on a stronger 4% organic growth, which resulted from significant pricing (+8%) that will likely be somewhat offset by volume declines (-4%). It also expects that sales growth will be curbed by ongoing brand rationalization (-2%), though favorable currency translation should provide a modest (+0.5%) offset. It believes HSY has considerable flexibility to increase trade spend to ease consumers into higher promotional price points, drive a sequential improvement in volumes, and ensure strong takeaway for its key Halloween period – though a significant increase in promotional activity would curb some of the pricing gains that HSY is likely to see.

Zacks Investment Research Page 5 www.zackspro.com

Provided below is a summary of revenue as compiled by Zacks Digest:

Revenue ($M) 3Q08A 2008A 2Q09A 3Q09A 4Q09E 2009E 1Q10E 2010ETotal Revenue $1,489.8 $5,132.9 $1,171.0 $1,484.0 $1,422.7 ↑ $5,314.3 ↓ $1,279.8 $5,512.8 ↓Digest High $1,490.0 $5,133.0 $1,171.2 $1,484.1 $1,472.0 ↑ $5,364.0 ↓ $1,289.0 $5,594.0 ↑Digest Low $1,489.6 $5,132.8 $1,171.0 $1,484.0 $1,395.0 ↑ $5,287.0↓ $1,270.6 $5,383.0↓ YoY Growth 6.5% 3.8% 6.0% -0.4% 3.3% 3.5% 3.5% 3.7%Sequential Growth 34.8%   -5.3% 26.7% -4.1%   -10.0%  

Highlights from the revenue table are as follows:

· For 2009, the estimated revenue ranges from $5,287.0 million to $5,364.0 million with an average of $5,314.3 million (↓ from the previous estimate of $5,363.6 million).

· For 2010, estimated revenue ranges from $5,383.0 million to $5,594.0 million with an average of $5,512.8 million (↓ from the previous estimate of $5,572.2 million).

Please refer to the Zacks Research Digest spreadsheet on HSY for detailed sales breakdown and future estimates.

Margins [NOTE: Only highlighted material has been changed]

According to the Company, gross margin improved by 480 bps y/y to 39.8% in 3Q09, due to the better price realization, supply chain efficiencies, productivity gains and lower dairy cost, which more than offset approximately 175 basis points of input cost inflation (e.g., raw materials, packaging, and energy) and higher employee benefit costs. HSY’s gross margin improved for the fourth consecutive quarter and increased to the highest level in more than four years. According to the Zacks Digest model, gross profit was $590.1 million in 3Q09, up 13.2% y/y. Gross margin was 39.8% in 3Q09 versus 35.0% in 3Q08.

According to the Company, operating profit was $190.6 million in 3Q09, up 16.0% y/y. HSY’s operating margin expanded by 280 bps y/y to 19.6% in 3Q09. The operating margin improved largely due to pricing benefits, cost savings resulting from the Supply Chain Transformation Program, and productivity gain, which more than offset higher commodity and employee-related costs, including pension expense and 50.0% y/y increase in advertising expense. According, to the Zacks Digest model, operating profit was $290.9 million in 3Q09, up 15.9% y/y. Operating margin was 19.6% in 3Q09 versus 16.8% in 3Q08.

SG&A expense as a percentage of sales increased by 210 bps y/y to 20.2% mainly due to the increase in A&P (Advertising and Promotion) expenditure and increased pension costs during the quarter. Specifically, the 50% increase in advertising and consumer spending during the quarter was due to increased support for core, international, and new products (e.g., Hershey Bliss); ongoing campaigns (e.g., Hershey Pure) and other seasonal and everyday programming and higher couponing activity. HSY remains committed to investing aggressively for new products and core brands.

Outlook

HSY continues to believe that if dairy spot market prices remain at current levels for the balance of FY09, the y/y annual commodity cost impact will be somewhat less than $175 million. Hershey continued to focus on expanding in-store marketing activity and improving retail execution in 3Q09, and plans to continue to invest in brand-building initiatives and holiday consumer promotions over the next few quarters. It will also launch a range of new products, including Hershey's Special Dark, Almond Joy, York Pieces, and Hershey's Bliss White Chocolate. As a result, management expects to increase 4Q09

Zacks Investment Research Page 6 www.zackspro.com

advertising spending by about 50% y/y relative to previous guidance of 40%-45% (i.e., $80 million increase from 2008 level of $161 million). It continues to expect tax rate to be 36% in FY09.

One firm (Citigroup) anticipate gross margin expansion of 250bps y/y to 39.9% in 4Q09 and a 10bps y/y improvement to operating margins in 4Q09 to 17%. This translates into a 300bps y/y improvement to FY09 gross margins of 38.7% and a 125bps y/y improvement to operating margins to 16.3% for FY09.

Another firm (Barclays Capital) expects 170 bps y/y of gross margin expansion in 4Q09 based on price increase benefit from investments in the Global Supply Chain Transformation initiative which should more than offset cost inflation. However, with less incremental pricing likely to come in 4Q09 on a sequential basis, 4Q09 margin expansion is expected to decelerate. In addition it expects an increase of 165 bps in SG&A expense, reflecting y/y increase in A&P spends, as well as an additional headwind from pension expense. As a result, the firm expects operating margin to increase by 5 bps y/y in 4Q09. In 2009, the firm expects advertising spend to increase by about $80 million given the Company’s still significant reinvestment needs and increased focus on advertising to ease consumers into higher price points.

One firm (Stifel Nicolaus) believes input cost inflation is fast becoming a significant challenge for the Company ,although it is difficult to know Hershey's hedged positions, the degree of inflation in inputs such as sugar (more than doubled from the prior year), cocoa (up over 30%), and dairy (moving higher and likely to continue to do so throughout early 2010) presents a strong risk to margins in FY10 even in the context of the cost savings flowing through in 2010 from 3-year cost reduction program.

As per the Zacks Digest model, total revenue would increase by 3.5% y/y and 3.7% y/y in 2009 and 2010, respectively. In comparison, COGS is expected to decrease by 0.7% y/y in FY09 and 2.4% y/y in FY10. SG&A expenses are expected to increase by 11.0% y/y in FY09 and 4.1% y/y in FY10. Hence, gross margin is expected to be 38.4% and 38.6% in 2009 and 2010, respectively, while operating margin is expected to be 16.2%, in both 2009 and 2010, respectively.

Provided below is a summary of margins as compiled by Zacks Digest:

Margins 3Q08A 2008A 2Q09A 3Q09A 4Q09E 2009E 1Q10E 2010EGross 35.0% 35.8% 38.9% 39.8% 38.6%↑ 38.4%↑ 37.2% 38.6%↑Operating 16.8% 15.0% 13.6% 19.6% 16.6% 16.2%↑ 14.2% 16.2%↑Pre-Tax 15.2% 13.1% 11.7% 18.1% 14.8%↑ 14.4%↑ 12.4% 14.6%↑Net 9.8% 8.4% 8.4% 11.4% 9.6% 9.2%↑ 7.7% 9.3%↑

Please refer to the Zacks Research Digest spreadsheet of HSY for more details on margin estimates.

Earnings per Share [NOTE: Only highlighted material has been changed]

According to the Company, GAAP net income in 3Q09 was $162.0 million, or $0.71 per diluted share, compared with $124.5 million, or $0.54 per diluted share, in 3Q08, including net pre-tax charges of $11.0 million and $31.0 million, or $0.02 and $0.10 per share, in 3Q09 and 3Q08, respectively. These charges were associated with the Global Supply Chain Transformation Program announced in February 2007. Excluding the net charges, adjusted net income from operations was $168.5 million, or $0.73 per diluted share, in 3Q09 versus $145.8 million, or $0.64 per diluted share, in 3Q08. Increase in EPS was primarily, due to cost savings and pricing change.

According to Zacks Digest Average, net income was $168.9 million or $0.73 in 3Q09 versus $145.9 million or $0.64 in 3Q08.

Outlook

Zacks Investment Research Page 7 www.zackspro.com

The Company expects GAAP EPS to be in a range of $1.80-$1.88 in FY09 including total GAAP charges relating to GSCT program of $100 million to $120 million, or $0.26 to $0.32 per diluted share. Excluding GAAP charges, the Company expects adjusted EPS guidance for FY09 to be in a range of $2.12-$2.14 slightly above the growth rate of 6%-8%. For FY10, management expects growth in adjusted earnings per share-diluted to be within long-term objective of 6% to 8%.

One firm (Barclays Capital) believes that even if HSY is able to grow volumes in the low single-digit range in 2010 through increased spending, EPS growth beyond the long-term target is not possible. More specifically, EPS upside could be limited not only from increased promotional activity, but also from several other potential headwinds in 2010, like input cost inflation. Although, a tailwind from pricing is expected, but it will likely produce less incremental productivity in 2010 versus 2009.

One firm (Citigroup) raised EPS estimates by $0.05 in 2009, by $0.02 in 2010 and $0.05 in 2011 to $2.15, $2.32 and $2.55 respectively, based on the confidence in Hershey’s ability to realize significantly higher prices, thus, raising its gross and operating margins and new product introductions.

Provided below is a summary of EPS as compiled by Zacks Digest:

EPS 3Q08A 2008A 2Q09A 3Q09A 4Q09E 2009E 1Q10E 2010EZacks Consensus         $0.62 ↑ $2.13 ↑ $0.45 $2.27 ↑Digest High $0.64 $1.88 $0.43 $0.73 $0.60 ↓ $2.15↑ $0.45 $2.31 ↑Digest Low $0.64 $1.88 $0.43 $0.73 $0.58↑ $2.12 ↑ $0.41 $2.17 Digest Avg. $0.64 $1.88 $0.43 $0.73 $0.60 $2.14 ↑ $0.43 $2.27 ↑YoY Growth -5.9% -9.6% 48.1% 14.1% 1.0% 13.6% 13.2% 6.0%Sequential Growth 120.3%   13.2% 69.8% -18.5%   -27.7%  Management Proforma Guidance

$2.12-$2.14

Management GAAP Guidance

$1.80-$1.88

Highlights from the EPS table are as follows:

· For 2009, EPS estimates range from $2.12 to $2.15 with a Digest average of $2.14 (↑ from the previous estimate of $2.06).

· For 2010, EPS estimates range from $2.17 to $2.31 with a Digest average of $2.27 (↑ from the previous estimate of $2.23).

Please refer to the Zacks Research Digest spreadsheet of HSY for more extensive EPS figures.

Target Price/Valuation [NOTE: Only highlighted material has been changed]

Of the fifteen firms covering HSY, six assigned negative ratings, eight conferred neutral ratings, and one gave positive ratings.

The Digest average target price is $39.00 (↑ from the previous estimate of $37.67; up 2.7% from the current price). Target prices given by the firms range from a low of $32.00 (down 15.7% from the current price) (MorganStanley) to a high of $49.00 (up 29.0% from the current price) (Citigroup). The firm (MorganStanley) with the lowest target price used combination of DCF model (WACC of 8.7% and a 1.5% long term growth rate) and P/E of 14x FY10 EPS estimate as its valuation metric. The firm (Citigroup) with the highest target price used P/E multiple of 19.0-19.5 multiple range on new FY11 EPS

Zacks Investment Research Page 8 www.zackspro.com

estimate of $2.55 for valuation. Most of the firms used a P/E multiple on 2009 EPS estimates as their valuation methodology.

Rating DistributionPositive 7.0%↓Neutral 53.0%↑Negative 40.0%↓Avg. Target Price $39.00↑ Digest High $49.00↑Digest Low $32.00↑Median $39.00 ↑No. of Firms with Target Price/Total 12/15

Metrics detailing current management effectiveness are as follows:

Metrics (TTM) Company Industry S&P 500Return on Assets (ROA) 9.54%↑ 1.52% ↓ 3.08%↓ Return on Equity (ROE) 62.55% ↓ 4.63% ↓ 7.60% ↓Return on Invested Capital (ROIC) 14.25% ↑ 2.38% ↑ 4.27% ↓

HSY’s ROA, ROE, and ROIC are higher than the overall market averages, as measured by the S&P 500, of 3.08%, 7.60%, and 4.27%, respectively.

Zacks Discounted Cash Flow (DCF) Model-based Valuation [NOTE: Only highlighted material has been changed]

Note: This section uses a proprietary Zacks Live DCF model which is also available to the user (see end note).

Background and Introduction to the model: The DCF valuation model discounts free cash flow (i.e. cash flow from operating activities minus capital expenditure), using an appropriate discount rate (i.e. expected or required return on the Company’s stock) to derive the Company’s fair value. The Zacks DCF model applies the average of figures provided by the brokerage firms for the initial years (i.e. 2009-2011) to forecast revenue, cost, and cash flow items to derive the free cash flow estimates for the years ahead, i.e. 2012-2060. These are summed up, by applying a present value factor using a discount rate. Then, the Residual, or Terminal value (at the end of 2060) is calculated using a pre-assumed growth rate and is added to the summed present value of the earlier years. The DCF fair value thus derived from the sum total of the discounted free cash flow for the years 2009-2060 and the terminal value is divided by the shares outstanding at the end of FY09, resulting in the Fair Value per share (DFCF). The Ratio of Share Price (P) to Fair Value per share (DFCF) gives an idea, as to, whether the stock is undervalued (in cases where P/DFCF is less than 100%) or overvalued (in cases where P/DFCF is more than 100%).

Portfolio managers should be able to use this model to directly convert their own near-term and long-term forecasts of the key company variables into a stock price and decide if HSY is undervalued or overvalued. To begin this process, we have developed three - Optimistic, Pessimistic, and Consensus - cash flow growth scenarios for HSY over the next 50 years described in detail below.

HSY’s Fair Value; Price/Fair value ratio; 3-, 10-, and 50-year Compound Annual Growth Rate, or CAGR, for total revenue, revenue segments, EPS, and free cash flow are mentioned in the table below:

Zacks Investment Research Page 9 www.zackspro.com

HSY, at a current share price (P) of $39.66 per share, growth rate (g) of 0.2% and required rate of return ( r) of 3.3%, is trading at a discount in all the three scenarios, i.e. Optimistic scenario (P/DFCF: 73.86%), Consensus scenario (P/DFCF: 72.56%) and the Pessimistic scenario (P/DFCF: 70.51%). This could indicate: (1) Investors are unduly pessimistic regarding the outlook for the Company, depressing the stock price; (2) Brokerage firm analysts are too optimistic regarding short- or long-term growth, profitability, or cost-containment; or, (3) The CAPM-based cost of capital, “r”, is substantially too low for HSY. Related to that last possibility, please see the table at the end of this section for some sensitivity analysis for some much higher inputs for “r”.

IRR value for “r” which will make the discount or premium approximately equal to zero, for each scenario.

Where Current Share price (P): $41.98g=0.2%

Required rate of return “r” Fair Value

Premium (Discount) of Price to Fair Value Ratio ((P/DFCF)-1)

Optimistic Scenario 8.81% $39.66 -0.0%

Consensus Scenario 8.50% $39.64 0.0%

Pessimistic Scenario 8.13% $39.69 -0.1%

The highest discount and premium are highlighted in the table, below.

Scenario

[current share price = $39.66]

Fair Value, or DFCF/Share

(std consensus

Terminal Long Term Growth rate & Rqd

r.o.r.)

Premium (Discount) of Price to Fair Value

Ratio ((P/DFCF)-

1)

Minimum Fair Value (Terminal

Long Term Growth Rate = 0.2%; Rqd r.o.r.

= 6.5%

Premium (Discount) of

the Share Price to Minimum

Fair Value Ratio (P/DFCF)

Maximum Fair Value

(Terminal Long Term Growth Rate = 1%; Rqd r.o.r. =

1.5%

Premium (Discount) of

the Share Price to

Maximum Fair Value Ratio ((P/DFCF)-1)

Consensus $144.52 -72.56% $57.08 -30.52% $814.66 -95.13%

Optimistic $151.70 -73.86% $59.63 -33.49% $856.18 -95.37%

Pessimistic $134.49 -70.51% $53.60 -26.01% $756.22 -94.76%

· The Consensus scenario yields a Fair Value for the stock of $144.52, with a range of $57.08 - $814.66.

· The Optimistic scenario yields a Fair Value for the stock of $151.70, with a range of $59.63 - $856.18.

· The Pessimistic scenario yields a Fair Value for the stock of $134.49, with a range of $53.60 - $756.22.

The following material relates to all three scenarios.

g=0.2%, r=3.3%, Current Share Price (P)=$39.66 Optimistic Consensus PessimisticFair Value per Share (DFCF) $151.70 $144.52 $134.49

Premium/Discount to DFCF -73.86% -72.56% -70.51%3-yr; 10-yr; 50-yr CAGR-Total Revenue 3.7%; 3.1%; 2.9% 3.5%; 3.0%; 2.8% 3.2%; 2.9%; 2.7%

3-yr; 10-yr; 50-yr CAGR-EPS 9.5%; 2.6%; 2.9% 8.3%; 4.1%; 3.5% 7.3%; 5.4%; 3.9%3-yr; 10-yr; 50-yr CAGR-Cash Flow from Operating Activities 11.1%; 2.3%; 2.7% 10.3%; 3.0%; 2.8% 9.4%; 4.7%; 3.0%3-yr; 10-yr; 50-yr CAGR-Capital Expenditure -18.4%; 2.5%; 2.8% -16.1%; 2.6%; 2.7% -15.3%; 2.5%; 2.6%3-yr; 10-yr; 50-yr CAGR-Free Cash Flow 28.0%; 2.7%; 2.9% 27.9%; 2.7%; 2.7% 28.1%; 2.9%; 3.4%

Zacks Investment Research Page 10 www.zackspro.com

The outlook for the food industry is positive. The industry is relatively mature and stable and is typically seen as a defensive area of investment with above-average yields.

While most companies in the packaged food universe (Cadbury, Mars, Kraft Foods, and Frito-Lay North America) are using productivity improvement initiatives and pricing to mitigate the impact of the high input costs, Hershey is on a different track. The Company is focusing on higher market spending, launch of new products, enhanced retail coverage, as well as, on its investment for international growth, focusing on Mexico, Brazil, Canada, and Asia.

In an effort to increase its potential for profitable growth, management is taking numerous initiatives to expand the Company’s margins, such as divesting low margin brands, rationalizing SKUs, and implementing numerous supply chain cost-reduction initiatives. The Company also maintains a strong cash flow position.

The scenarios are discussed in detail below.

►Consensus Scenario: The consensus scenario uses the average of the brokerage firms’ estimated figures for the first two years to project for future years.

The key factors which drive the consensus scenario are:

1) Currently, Hershey is hedged on selected commodities and is benefiting from non-hedged dairy. However long term concerns remains around cocoa productions as cocoa costs are expected to remain at high cost levels for an extended period due to crop rotation.

2) HSY plans to double its advertising spending to support its core brands like Kisses, Reese’s and is trying to establish its market-leading sustainable platforms.

Despite 10% price increase initiatives taken by HSY, volume decline had only been 2.5% in 2Q09, thus HSY has managed its price/volume elasticity quite well. The brokerage firms expect the same trend to continue in the coming years. Margins are expected to improve in the future based on initiatives taken by management and reduced cost inflation.

The food industry is mature and in order to maintain a competitive position in the industry, the brokerage firms believe that the Company must focus continuously on building brand image, product innovation, product quality, consumer tastes, manufacturing expertise, and price, advertising, promotion, and mass distribution capabilities. However, the chocolate industry has the structural advantages of rational competitors and the absence of a low price generic segment. In addition, the firms believe that poor execution, heightened competition, unfavorable foreign currency exchange rates, increased pension expense, and the need for increases in consumer spending will pressure HSY’s performance in the foreseeable future.

►Optimistic Scenario: The optimistic scenario uses the highest figure of the brokerage firms’ estimates for the first two years to project results for future years.

The optimistic firm expects that despite the current headwinds created by an onerous input cost environment, Hershey should continue to generate solid cash flow and EPS growth in the high, single-digit range over the long term, given its leading position in the steady U.S. chocolate market. The firm expects near-term sales growth to be driven by new products and growth of core brands in non-traditional distribution channels.

Pessimistic Scenario: The pessimistic scenario uses the lowest figure of the brokerage firms’ estimates for the first two years to project for future years.

Zacks Investment Research Page 11 www.zackspro.com

The firms which are bearish on the Company believe HSY is trading at a premium compared with its peer group, which is not justified, given the weak sales momentum, as well as, the commodity cost pressure and given the current credit environment. The firms think that the shares are more appropriately valued in the low to mid $30's.

The firms maintain a cautious approach towards the stock as the Company has no long-term strategy and no new product introductions slated for 2009 to overcome the market share lost to rival Mars. The firms view the acquisition of Wrigley by the privately-held Mars Inc. as a greater long term threat. One of the major competitors of HSY is also Cadbury plc.

Sensitivity Analysis: Though pre-assumed for our analysis, it has been observed that varying assumptions of ‘g’ and ‘r’ play an important role in determining the overall fair value of the Company. For HSY, the value of ‘g’ bears a direct relation to the DFCF value, that is, a higher growth rate implies a higher DFCF for the Company, while the value of ‘r’ bears an inverse relation to DFCF per share, i.e. higher ‘r’ implies low DFCF and the converse also applies. Detailed in the table below are the DFCF results computed in three scenarios using different values of ‘g’ and ‘r’.

Current Share price (P): $39.66 ‘r’ Optimistic Consensus Pessimistic‘g’=0.2% 1.5% $432.78 $411.66 $381.93

3.3% $151.70 $144.52 $134.49

5.0% $85.76 $81.91 $76.58

6.5% $59.63 $57.08 $53.60

9.0% $38.22 $36.72 $34.70

10.5% $31.14 $29.97 $28.40

12.0% $26.17 $25.22 $23.96

‘g’=0.5% 1.5% $512.17 $487.22 $452.11

3.3% $156.64 $149.22 $138.85

5.0% $86.64 $82.74 $77.36

6.5% $59.87 $57.32 $53.82

9.0% $38.26 $36.76 $34.73

10.5% $31.15 $29.98 $28.41

12.0% $26.18 $25.23 $23.97

‘g’=1.0% 1.5% $856.18 $814.66 $756.22

3.3% $167.73 $159.77 $148.66

5.0% $88.39 $84.41 $78.91

6.5% $60.34 $57.76 $54.24

9.0% $38.33 $36.83 $34.80

10.5% $31.18 $30.00 $28.43

12.0% $26.19 $25.24 $23.98

‘g’=2.0% 1.5% N/A N/A N/A

3.3% $215.50 $205.25 $190.89

5.0% $93.65 $89.42 $83.56

6.5% $61.60 $58.96 $55.35

9.0% $38.51 $36.99 $24.00

10.5% $31.24 $30.06 $28.49

12.0% $26.21 $25.26 $24.00

For more information, please refer to the Zacks DCF model of HSY, available at the user webpage or via ZRS 5, where the user is also free to change assumptions and figures.

Zacks Investment Research Page 12 www.zackspro.com

Capital Structure/Solvency/Cash Flow/Governance/Other [NOTE: Only highlighted material has been changed]

Cash Flow and Balance Sheet

The Company improved its balance sheet and cash flow in 3Q09. Cash on hand increased to $119 million at the end of 3Q09 from $37 million at the end of 3Q08. Accounts receivable rose to $568 million in 3Q09 from $455 million in 3Q08, but inventories fell by $33 million y/y in 3Q09. Total debt declined to $1.75 billion from $2.0 billion at the end of 3Q08, and short-term debt declined to $243.0 million from $501.5 million in 3Q08.

HSY reiterated its 2009 capex guidance of $155-$165 million, down $20 million from 2008.

The Company repurchased shares, but only to compensate for exercised stock options. It currently has $100 million remaining under its regular buyback authorization. HSY pays an annual dividend of $1.19, which currently yields about 3.1%.

Restructuring

On February 15, 2007, HSY announced a three-year Global Supply Chain Transformation program (GSCT), which includes slashing about 11% of jobs, cutting production lines, and building a production plant in Mexico. The Global Supply Chain Transformation program is expected to result in pre-tax charges and non-recurring project implementation costs of $640 million to $665 million, which includes $60 million of project management and start-up costs and is expected to generate incremental cost savings of $60-$80 million during 2009 leading to cumulative savings of $140-$160 million from the ongoing cost savings initiative.

Total GSCT program costs till the end of 3Q09 are $602.7 million. For 2009, total GAAP charges related to the GSCT program including non-cash pension settlement charges are expected to be $100 million to $120 million, $0.26 to $0.32 per share-diluted.

October 26, 2009

Potentially Severe Problems [NOTE: Only highlighted material has been changed]

None other than discussed in the other section of this report. October 26, 2009

Long-Term Growth [NOTE: Only highlighted material has been changed]

The long-term growth rates provided for the Company range from 7.0% (BofA Merrill Lynch) to 8.0% (Argus Fundamental Research) with a Digest average of 7.5%.

The outlook for the food industry is positive. Broadly defined, the industry includes a large number of packaged food concerns, meat and dairy processors, and companies with agricultural operations. The industry is relatively mature and stable and is typically seen as a defensive area of investment with above-average yields.

HSY believes that it’s focused approach with consumer-centric innovation and continued international expansion will help it to achieve its targeted long-term net sales growth rate of 3%-5%. As marketplace

Zacks Investment Research Page 13 www.zackspro.com

trends improve and targeted consumer initiatives are executed, the Company expects to achieve an EPS growth rate of 6%-8%.

Management stated that HSY’s strong sales growth combined with its solid cost control will deliver record profitability. However, HSY’s plans to introduce fewer new products and focus on key brands and trends (e.g., organic, dark chocolate) going forward.

The Company is leveraging its iconic brands, and is capitalizing on its value chain capabilities to strengthen its confectionery leadership and gain critical mass in the snacks category. HSY plans to sharply increase (i.e. likely double) its advertising/trade spending to support its core brands like Kisses, Reese’s, and Hershey’s as it tries to establish market-leading sustainable platforms. Moreover, the Company will invest for innovation, as well as, category expansion in categories in which it expects to grow in mid-teens percentages over the next five years, but in which it has lagged behind its peers, particularly the premium and dark chocolate categories.

The firms in the Digest group, in general, favor HSY’s leading U.S. market share and dominant position in chocolates and see confectionery as an above-average growth category. The Company enjoys an oligopolistic position in the domestic market, with its accompanying benefit to prices. The Company derives less than 20% of its sales from foreign markets. However, the firms also state that as the United States is a mature and developed market, so relying heavily on this market could limit the Company’s growth, and affect its position versus major foreign competitors, such as Cadbury, Nestle, and Kraft.

October 26, 2009

Upcoming Events [NOTE: Only highlighted material has been changed]

On December 15, 2009, HSY will pay quarterly dividends of $0.2975 on the Common Stock and $0.2678 on the Class B Common Stock, to stockholders of record November 25, 2009, as declared on October 9, 2009.

On January 25, 2010, HSY is expected to announce its 4Q09 and FY09 financial results.

Individual Analyst Opinions [NOTE: Only highlighted material has been changed]

POSITIVE RATINGS (6.7%)

Citigroup – Buy ($49.00 – target price) – 10/22/09 –The firm maintained a Buy rating and increased the target price from $48.00 to $49.00 based on solid fundamentals (strong pricing, new product introductions, etc.) and valuation metrics. INVESTMENT SUMMARY: The firm believes that despite the current headwinds created by an onerous input cost environment, Hershey should continue to generate solid cash flow and EPS growth in the high-single-digit range over the long term given its leading position in the steady U.S. chocolate market. It anticipates near-term company sales growth will come from the increased advertising spending and resurgence in the firm's core chocolate business.

NEUTRAL RATINGS (53.3%)

Argus Fundamental Research – Hold (no target price) -10/23/09 –The firm maintained a Hold rating with no specific target price. INVESTMENT SUMMARY: The firm believes that Hershey shares remain fairly valued at current levels

Zacks Investment Research Page 14 www.zackspro.com

BMO Capital – Market Perform ($40.00 – target price) – 10/23/09 – The firm maintained a Market Perform rating, and the target price of $40.00. INVESTMENT SUMMARY: The firm maintains a neutral stance on the stock as despite the Company’s limited exposure to private label and improving market share trends, HSY’s long-term growth rate of 6%-8% remains below the best in breed US packaged food companies such as K and GIS.

Gabeli – Hold (no target price) -10/23/09 –The firm maintained a Hold rating with no specified target price.

Soleil Securities – Hold ($40.00 – target price) – 10/22/09 –The firm maintained a Hold rating and reduced the target price from $41.00 to $40.00.

Barclays Capital – Equal weight ($37.00 – target price) – 10/23/09 – The firm maintained an Equal weight rating with target price of $37.00. INVESTMENT SUMMARY:

BofA Merrill Lynch – Neutral ($42.00 – target price) - 10/22/09 –The firm maintained a Neutral rating and the target price of $42.00. INVESTMENT SUMMARY: The firm believes management has made measurable progress in its efforts to stabilize operations and lay the foundation to reaccelerate growth.

Janney Montgomery – Neutral ($41.00 – target price) – 10/22/09 – The firm maintained a Neutral rating with target price increased from $40.00 to $41.00 to reflect lower pricing improving the volume.

UnionBankSwitz. – Neutral ($41.00 – target price) – 10/22/09 – The firm maintained a Neutral rating and increased the target price from $40.00 to $41.00 to reflect take-away momentum and medium-term deflation benefits. INVESTMENT SUMMARY: The firm believes things get tougher starting in 4Q09. Comparisons are more challenging, the input cost forecast looks tougher, and HSY expects higher seasonal promoted price points for Valentine day and Easter season.

NEGATIVE RATINGS (40.0%)

Bernstein – Underperform ($34.00 – target price) – 10/22/09 – The firm reiterated an Underperform rating and increased the target price from $33.00 to $34.00. INVESTMENT SUMMARY: Going forward, the firm expects margin comparables to get tougher for Hershey, which should make recent momentum hard to sustain. There also remains more uncertainty surrounding top line growth for the Company versus its peers in the U.S. Food group. Moreover, Hershey's valuation still remains rich versus peers, particularly given the firm’s strong belief that is more likely to be a net acquirer than an acquiree.

Deutsche Bank – Sell ($36.00 – target price) – 10/22/09 – The firm maintained a Sell rating and increased the target price from $35.00 to $36.00. INVESTMENT SUMMARY: The firm remains cautious on the stock based on several concerns, such as, long term input cost inflation, longer-term competitive conditions, and the difficult-to-justify premium valuation.

Goldman – Sell ($38.00 – target price) – 10/22/09 – The firm reiterated a Sell rating and the target price of $38.00. INVESTMENT SUMMARY: The firm remains cautious as volumes could weaken following the price increases and expects both organic sales growth and gross margin expansion to slow, as pricing rolls off in 2010 and input costs increase modestly. It sees management's 6-8% growth guidance as generally appropriate given moderating pricing and a need to continue to improve brand investment. In addition, it views Hershey as a structural laggard as it lacks significant exposure to emerging markets and faces an increasing competitive threat from a consolidating global confectionary industry.

J.P. Morgan – Underweight ($38.00 – target price) – 10/22/09 – The firm maintained an Underweight rating and increased the target price from $34.00 to $38.00. INVESTMENT SUMMARY: The firm remains cautious on the stock based on concerns about commodity inflation, volume growth prospects

Zacks Investment Research Page 15 www.zackspro.com

and competitive issues. Over time, it believes Hershey will come under increased competitive pressure from the acquisition of Mars/Wrigley and, the merger of Kraft and Cadbury.

MorganStanley – Underweight ($32.00 – target price) – 10/22/09 – The firm maintained an Underweight rating and increased the target price from $30.50 to $32.00 to reflect both higher than previously forecasted earnings and higher sector multiples. INVESTMENT SUMMARY: The firm remains cautious on the stock based on the following factors: i) Margins are back at previously unsustainable levels and input cost inflation (cocoa, dairy, sugar, etc.) is likely to accelerate in coming quarters; ii) Competition from Mars is likely to get more difficult; iii) Valuation is at a 35% premium to the peer group and iv) Promotional spending risk remains around key Halloween, Valentine’s Day and Easter seasons.

Stifel Nicolaus – Sell (no target price) – 10/22/09 – The firm reiterated a Sell rating with no specified target price. INVESTMENT SUMMARY: The firm believes that the Company is on the right track, but not performing well enough to merit its quite rich current valuation growth. It views the Company's intermediate and long-term prospects as average in relation to most of its competitors. It believes that Hershey will not participate in the potential consolidation occurring in the industry through Kraft's attempted purchase of Cadbury as the Hershey Trust does not want to give up control of this company, which could well be required in order for Hershey to participate in the bidding for Cadbury.

Research Associate Sankha Subhra Mitra

Copy Editor Avishek Mishra

Content Ed. Avishek MishraNo. of brokers reported/Total brokersReason for Update Flash