Hormel Foods (HRL, Financial), one of the prominent meat processing companies in the country, competes with the largest meat processor, Tyson Foods (TSN, Financial). The company’s second-quarter fiscal 2015 results were a mixed bag, as it beat on earnings but failed to impress on sales. Let’s recap the numbers and see if this can be a good investment in the long run
Second-quarter numbers
Hormel generated second-quarter sales of $2,279.3 million, representing a year-over-year growth of 1.5%. This was driven primarily on the back of robust performances from Jennie-O Turkey and Specialty Foods segment of the company, which was partly offset by decline in International and Refrigerated segments of the company. However, analysts were expecting $120 million more.
Jennie-O Turkey segment sales grew a whopping 15.4% year over year to $438.9 million. Despite the avian influenza outbreak disrupting the supply chain, lower grain and fuel input expenses resulted in segment’s profit increasing by 41% year over year to $74.6 million.
On the back of higher MUSCLE MILK product sales, the Specialty Foods segment revenue witnessed 32.3% growth to $287.4 million. On the other hand, the Grocery Products segment grew 1.3% to rope in sales of $397.3 million.
Weakness in demand due to a strong U.S. dollar and port strike pulled down the International & Other segment revenues by 7.5% to $133.2 million. Also, the Refrigerated Foods segment declined 8% year over year to $1,022.5 million.
Adjusted earnings came in at $0.67 per share, representing a whopping 28.8% year over year growth, and it beat analysts’ expectations by $0.04 per share.
Hormel exited the second quarter with cash and cash equivalents of $624.4 million, and long-term debt of $250.0 million.
As a Dividend Aristocrat, Hormel paid its 347th consecutive quarterly dividend.
Earnings growth decoded
Clearly, a 1.3% growth in revenue could not have fueled around 29% growth in earnings. Let’s take a look at the segment profits.
- Refrigerated Foods: Profit increased 52% year over year.
- Jennie-O Turkey: Profit increased 41% year over year.
- Grocery Products: Profit increased 1% year over year.
- Specialty Foods: Profit increased 11% year over year.
- International & Other: Profit increased 2% year over year.
So, it was the Refrigerated Foods and Jennie-O Turkey segments that contributed to the earnings growth. The grain prices are low and meat prices are high. This ideally is the best-case scenario. Meat prices are high as the avian flu outbreak has killed over 39 million birds, forcing companies to increase prices for eggs and turkeys. However, this best-case scenario isn’t going to last forever, so this surge in earnings growth is not going to be persisting in the long run.
Outlook
A supply side constraint because of the avian flu outbreak is preventing Hormel from making the most of the “best-case scenario.” Despite this, fiscal 2015 earnings are expected to be in the range of $2.50 to $2.60 per share.
Final words
Avian flu outbreak will impact the growth of Jennie-O Turkey revenues and profits in the upcoming quarters. Hormel is trading at a trailing P/E of 24.75 and has a forward P/E of 20.93 signifying earnings growth.
Also, for the next five years, analysts expect compound annual growth of 7.10% versus over 10% for the past five years, implying a slowdown in growth. In addition, the stock looks overvalued based on current valuations.
Hence, it is better to watch the stock from the sidelines for a quarter or two.
