Hormel Keeps Growing

Last week, Hormel (HRL, Financial) delivered its fourth-quarter and fiscal full-year 2016 results. The $18.98 billion packaged goods company reported a 2.8% sales growth to $9.5 billion for the year and reported an outstanding 29.7% profit growth to $890 million.

Hormel’s shares closed 2.63% up on the same day of the earnings announcement, while the Standard & Poor’s 500 index closed 0.22% up.

“We had a strong finish to fiscal 2016, achieving record earnings for the fourteenth consecutive quarter.

"Three of our five business segments delivered sales, volume, and earnings growth, again demonstrating our balanced business model. Refrigerated Foods and Jennie-O Turkey Store both had excellent quarters with growth coming from value-added, branded products and improved market conditions. Grocery Products enjoyed a strong quarter aided by the inclusion of the JUSTIN’S® specialty nut butter business in addition to strong results from SPAM® luncheon meat and SKIPPY® peanut butter.

“Specialty Foods sales declined, primarily due to the divestiture of Diamond Crystal Brands in May, while sales of MUSCLE MILK® protein products were strong.

“Specialty Foods earnings decreased primarily due to increased advertising. Our International segment had a tough quarter as the team continues to work through challenging market conditions in China.

“Fiscal 2017 will mark the 51st consecutive year we have increased our dividend, an accomplishment few other companies can claim,” Snee said. “Effective in the new fiscal year the annual dividend will be $0.68 per share, a 17 percent increase.” -Jim Snee, president and CEO

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Outlook

“In fiscal 2017, we expect to generate organic sales growth consistent with our long-term goal of five percent coupled with mid-single-digits earnings growth. (5)

“Taking all these factors into account and considering the previous three years of strong double digit earnings increases, we would have expected our fiscal 2017 earnings guidance range to be $1.71 to $1.77 per share.

“However, after excluding earnings from the Farmer John divestiture of approximately 3 cents per share, we are setting our fiscal 2017 earnings guidance range at $1.68 to $1.74 per share.” - Jim Snee, president and CEO

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The fiscal year 2017 outlook remains in bounds with Hormel’s recent sales growth historical figures with an anticipated 4.27% earnings per share (EPS) increase after delivering a 29% EPS growth in 2016.

Valuations

Hormel had a trailing 12-month price-earnings (P/E) of 21.9 times (industry median: 19.8), price-book (P/B) multiple of 4.26 times (industry median: 1.7) and price-sales (P/S) ratio of 2 times (industry median: 1) (1). The company also had a trailing dividend yield of 1.62% and a 36% payout ratio.

Hormel paid its 353rd consecutive quarterly dividend on Nov. 15.

Performance

Hormel had a five-year total return of 21.5%, while the S&P 500 index had 16.3% (2). The company underperformed the index year to date with -7.8% versus 10.45%.

(10-K Filing)

Hormel

Hormel is a 125-year-old meat and food producer who saw its sales and profits grow by 3.9% and 13.8% to $9.5 billion and $890 million, respectively, over the last five years

The company is primarily engaged in the production of a variety of meat and food products and the marketing of those products throughout the United States and internationally (3).

Hormel operates a wholly-owned subsidiary, Hormel Foods International Corp., to perform as the parent business in countries like Australia, Canada, China, Japan and the Philippines.

Hormel can classify its products into four categories: perishable (53%) of total fiscal 2015 sales, poultry (18.6%), shelf-stable (18.4%) and miscellaneous (10%) (4).

(Earning Release)

Hormel has five business segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store (JOTS), Specialty Foods and International & Other.

(Annual Report)

Grocery ProductsÂ

Grocery products accounted for 17.7% of total fiscal 2016 sales with $1.68 billion. This segment consists primarily of the processing, marketing and sale of shelf-stable food products sold predominantly in the retail market (6).

Hormel’s Grocery Products portfolio features items such as Skippy peanut butter, Skippy P.B. Bites, Hormel chili, the SPAM family of products, Hormel Compleats microwaveable meals, Hormel bacon toppings and Hormel Mary Kitchen. Also included in this segment’s portfolio are Herdez and CHI-CHI’S salsas and foods and Wholly Guacamole dips.

The segment grew 4.1% in 2016 and delivered an operating margin of 15.9%, the second highest among the five business segments.

(Annual Report)

Refrigerated FoodsÂ

The refridegerated foods segment accounted for 48.8% of total fiscal 2016 sales with $4.6 billion. This segment consists primarily of the processing, marketing and sale of branded and unbranded pork and beef products for retail, foodservice and fresh product customers (7).

Trusted brands in the segment include all-natural Hormel Natural Choice meats, Hormel Cure 81 hams, Hormel pepperoni, Hormel REV wraps, Hormel refrigerated entrees, Hormel side dishes, Hormel Black Label bacon, Hormel Gatherings party trays and Lloyd’s barbeque ribs. In 2015, the company acquired Applegate, the number one brand of natural and organic meats.

The segment grew 6.3% in fiscal 2016 and delivered an operating margin of 12.6%, compared to 9.7% in fiscal 2015.

(Annual Report)

Jennie-O Turkey StoreÂ

Jennie-O accounted for 18.3% of total fiscal 2016 sales at $1.74 billion. This segment consists primarily of the processing, marketing and sale of branded and unbranded turkey products for retail, foodservice and fresh product customers. Jennie-O Turkey Store is one of the largest turkey processors and marketers in the world, offering over 1,500 products distributed in more than 20 countries (8).

The segment grew 6.4% in 2016 and delivered an operating margin of 18.9%, compared to 16.9% in 2015.

(Annual Report)

Specialty FoodsÂ

Specialty foods accounted for 9.9% of total fiscal 2016 sales at $939 million, compared to $1.1 billion in 2015. This segment consists of the packaging and sale of private label shelf stable products, nutritional products, sugar and condiments to industrial, retail and foodservice customers, including the results of Diamond Crystal Brands (DCB), CytoSport/Century Foods International and Hormel Specialty Products (HSP).

According to Hormel, the segment reported decline in sales and profits primarily due to the divestiture of Diamond Crystal Brands in May. Sales in specialty food segment grew -14.9% in 2016 and delivered an operating margin of 11.8%, compared to 8.5% in 2015.

(Annual Report)

International & Other

The final segment accounted for 5.4% of total 2016 sales with $511 million. This segment includes Hormel Foods International. International operations grew -4.4% in 2016 and delivered an operating margin of 15.3%, compared to 14.6% in 2015.

Cash, debt and book value

Hormel had $415 million in cash and $250 million in long-term debt as of Oct. 30, representing a 0.06 debt-equity ratio. Hormel also had 43% of its $6.37 billion assets in intangibles, while having a book value of $4.45 billion.

Cash flow

(Earnings Release)

In 2016, Hormel grew its cash flow from operations by 0.08% to $992.8 million. The company’s outstanding profit growth was offset by an increase in working capital cash flow that led to the minute cash flow growth. Capital expenditures for the year was $249.3 million, leaving the company with a free cash flow of $743.6 million. This is compared to $866.4 million in 2015.

Hormel also paid $384.4 million, or 51.7% of free cash flow, in dividends and buybacks, while having a three-year average free cash flow payout ratio of 42.4%. Hormel also reduced its debt by $185 million.

Conclusion

(Hormel Business Margins, Morningstar and Recent Earnings Release)

As observed, not only was Hormel able to deliver steady low to mid-single digit billion-dollar annual sales, but the company also outstandingly managed to grow its profits throughout the decade by improving its margins.

Hormel also has a strong balance sheet with a good amount of intangibles. Valuations indicate the company is currently selling at a premium compared to its peers.

(Google Finance)

Analysts at Edward Jones and Credit Suisse give the stock a buy and outperform rating. Using the five-year historical earnings multiple, its EPS forecast for fiscal 2017 and a 20% margin indicates a value of $31 a share.

In summary, Hormel is neither a buy nor a hold.

Notes

(1) GuruFocus data.

(2) Morningstar data.

(3) 10-K filing.

(4) Annual filing: The Perishable category includes fresh meats, frozen items, refrigerated meal solutions, sausages, hams, wieners, guacamole and bacon (excluding JOTS products).

The Poultry category is composed primarily of JOTS products; Jennie-O Turkey Store (JOTS).

Shelf-stable includes canned luncheon meats, shelf-stable microwaveable meals, stews, chilies, hash, meat spreads, flour and corn tortillas, salsas, tortilla chips, peanut butter and other items that do not require refrigeration.

The Miscellaneous category primarily consists of nutritional food products and supplements, sugar and sugar substitutes, dessert and drink mixes, and industrial gelatin products.

(5) Earnings release (further commentary on FY 2017 outlook by Jim Snee):

“Grocery Products is positioned to deliver an excellent year aided by the inclusion of Justin's specialty nut butters and contributions from branded products such as Skippy peanut butter and Herdez salsas. Jennie-O Turkey Store should benefit from favorable grain prices and increasing demand for Jennie-O branded products. We anticipate continued low input costs for our value-added products in Refrigerated Foods in addition to positive momentum in both retail and foodservice channels.”

“We expect the International segment to show growth through increased exports and improved results from our China business.”

“Specialty Foods is expected to show year-over-year sales and earnings growth net of the Diamond Crystal Brands divestiture and will benefit from continued strong results from Muscle Milk protein products.”

(6) 10-K filing: This segment also includes the results from the Company’s MegaMex Foods, LLC (MegaMex) joint venture.

(7) 10-K filing: This segment includes the results of Applegate Farms LLC (Applegate) and Affiliated Foods (Farmer John, Burke and Dan’s Prize).

(8) Annual Report.

Disclosure: I do not have shares in Hormel.

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