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An Impressive Hormel Foods Looks Like a Buy

April 07, 2014 | About:
rusticnomad

Rustic Nomad

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Meat producer Hormel Foods (HRL) released impressive first quarter results for the year. EPS was up by 19%. Out of its five segments, four of them performed excellently. The optimism about this momentum is expected to continue. Hence, a quick lookup on the company’s performance is illustrated ahead along with the comparison with its peers Tyson Foods (TSN) and Pilgrim’s Pride (PPC).

Quarterly Performance

Hormel reported a 6% rise in revenue for the previous quarter with sales of grocery products rising 20%. The increasing popularity of Skippy peanut butter, Hormel chili, Hormel bacon toppings and the HERDEZ line of salsas and sauces leading to this revenue increase.

The high beef and pork input costs narrowed Hormel’s profit margin despite good sales. The SPAM brand also demonstrated weak performance last quarter in terms of sales. But the refrigerated segment witnessed increased sales. A variety of products in the segment that drove the crazy growth were Hormel BLACK LABEL bacon, LLOYD'S Ribs and Hormel REV Snack Wraps.

Hormel’s food service business declined 1% due to increased utilization of raw materials internally. However, its sales grew in the food service business due to good sales of products such as Hormel Fire Braised meats and Old Smokehouse Pecanwood Smoked Bacon.

The Road Ahead

Hormel's aggressive marketing strategies including organizing national media campaigns and other promotional activities to support its SPAM line of products and Compleats microwave meals to improve profitability in the second quarter is expected to be successful. Hormel’s Jennie-o-Turkey is expected to perform even better in the next quarter.

Moreover, Hormel is excited about its aggressive sales of the Skippy peanut butter brand, and refrigerated products like pork and beef. Hormel REV Snack Wraps, a Hormel’s product, is also seeing growth.

Valuation

Hormel is expensive in comparison to peers Tyson Foods and Pilgrim’s Pride. But this premium has some concrete reasons behind it. As illustrated above, Hormel’s CAGR for the next five years is the highest of the lot at 11%. Peers Tyson and Pilgrim’s Pride are far behind with 7% and 9% projected growth rates, respectively. Also, Hormel has an excellent profit margin in comparison to peers, which makes it a good pick in an environment of rising input costs.

For example, the rising propane prices and fuel costs ought to increase input costs at Pilgrim’s Pride and these might affect profitability. Also, the increasing forward P/E ratio for Pilgrim as expected by the analysts going forward indicates a drop in earnings in the next couple of years. Finally, Tyson has the lowest profit margin among the competitors, and its profit growth expectation is also the lowest. Moreover, Tyson’s dividend yield of 0.80% is vey low in comparison to Hormel’s impressive 1.70% yield. So, Hormel looks like a better buy despite being expensive.

Conclusion

Hormel Foods' sharp focus on unique marketing strategies and business diversification that includes grocery foods, refrigerated foods and food service, looks like an intelligent investment. Its growth projections and profit margins which are quite impressive make it the best buy option among the peers.


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