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Measured Approach: In Hog Heaven With Hormel Foods

January 24, 2010 | About:
Hormel Foods Corporation, based in Austin, Minn., is a multinational manufacturer and marketer of consumer-branded food and meat products, many of which are among the best known and trusted in the food industry. The company leverages its extensive expertise, innovation and high competencies in pork and turkey processing and marketing to bring quality, value-added brands to the global marketplace. The company is a member of the Standard & Poor's 500 Index. Hormel Foods was named one of "The 400 Best Big Companies in America" by Forbes magazine for the 10th consecutive year. The company enjoys a strong reputation among consumers, retail grocers, foodservice and industrial customers for products highly regarded for quality, taste, nutrition, convenience and value. For more information, visit http://www.hormelfoods.com.

Unilever announced that it has signed a definitive agreement with Hormel Foods Corporation to sell its Shedd's Country Crock(R) branded chilled side-dish business in the US. Under the terms of the transaction, Hormel will market and sell Shedd's Country Crock chilled side-dish products, such as homestyle mashed potatoes, under a license agreement.

By the Numbers

Quarterly sales for the last four reported quarters are inconsistent. For the quarter ending 01/09, sales stood at $1,689.1 million. Over the next two quarters they declined to $1,574.4 million and then turned up to $1,675.1 million for the quarter ending 10/09. Reuter’s reports analyst estimates for the quarter ending 01/10 may be as high as $1,729.5 million.

The decline in the sales (3.3%) may be attributable to a lack of pricing power in today’s environment. Historically, sales grew at the rate of 4.4% over the past three years and 6.5% over the past five years. The Company is adding new product through the acquisition of Shedd’s Country Crock product line and through the introduction of Mexican foods by its new joint venture MegaMex Foods. These additions should boost sales.

On the other hand, quarterly earnings held up fairly well. The Company reported EPS of $0.60 in the quarter ending 01/09 and declines to $0.59 and $0.57 in the quarters ending 04/09 and 07/09 respectively before jumping back to $0.77 for the quarter ending 10/09. Reuter’s reports consensus estimates of $0.68 for the quarter ending 01/10.

Looking ahead, consensus estimates are $2.67 for FY 10 and $2.87 for FY 11 on sales of $6,782.71 million and $7,111.07 million. The EPS growth rate exploded for the TTM ending 10/09 to 21.9%. The three year average EPS growth rate is 7.0% and the five year EPS growth rate is 8.6%.

The gross margin for the trailing twelve months ending 10/09 (TTM) at 16.8% have held up well and reflect strength when compared with FY 08 and FY 07. Similarly, operating margins have grown from 7.8% in FY 07 to 7.6% in FY 08 to 8.2% in FY 09. Net margins reflect these trends, as well. Net margin recovered to 5.2% in 10/09 from 4.2% in 10/08.

Both operating and net margins are consistently better than industry medians. This reflects well on management’s ability to control costs. Return on Equity at 16.6% and Return on Assets at 9.4% are higher than in the prior three fiscal years and above industry medians.

Hormel has a strong balance sheet. The current ratio stands at 2.3X (better than the industry median) and total liabilities to total assets stand at 42.5%, below the industry median.

Long-term debt stands at $350 million. The times interest earned ratio is better than 19X.

The Company pays an indicated dividend of $0.84 providing a current yield of 2.2%.The dividend is well covered and represents a payout of 29.7%. Dividends have grown at an annual rate of 10.7% over the past three years and 11.1% over the past five years.

Conclusion

We see modest but consistent growth potential for Hormel Foods. Based on the consensus EPS estimate of $2.87 for FY 11 and our evaluation of risk, we place an investment value of $56.29 on this company. We think this is a buy.

Disclosure: Author has a long position in HRL.

Ronald Sommer

http://measuredapproach.worldpress.com



About the author:

Ronald Sommer
Mariusz Skonieczny is the founder and president of Classic Value Investors, LLC, an investment management firms that builds and manages customized investment portfolios for its clients. He is the author of Why Are we So Clueless about the Stock Market? Learn How to Invest Your Money, How to Pick Stocks, and How to Make Money in the Stock Market. Email: mskonieczny [at] classicvalueinvestors [dot] com. Webpage: www.classicvalueinvestors.com

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