Hormel Foods Corp. (HRL, Financial) is a consumer packaged foods company that develops, processes and distributes various meat, nuts and food products to retail, foodservice, deli and commercial customers on a global basis. It provides various perishable products such as fresh meats, frozen items, refrigerated meal solutions, sausages, hams, guacamoles and bacon. Shelf-stable products include canned lunch meats, nut butters, snack nuts, chilies, shelf-stable microwaveable meals, hashes, stews, tortillas, salsas and tortilla chips.
Top brands include SKIPPY, SPAM, Hormel, Natural Choice, Applegate, Justin's, Jennie-O, Café H, Herdez, Black Label, Sadler’s, Columbus, Gatherings, Herdez, Wholly, Columbus, Planters, NUT-rition, Planters Cheez Balls and Corn Nuts.
The company has recently reorganized into three distinct operating segments, Retail, Foodservice and International. Earnings will be reported under this structure beginning in the first quarter of fiscal 2023.
Founded in 1891, the Austin, Minnesota-based company was formerly known as Geo. A. Hormel & Co. and changed its name to Hormel Foods Corp. in January 1995. The company currently has a market capitalization of approximately $25 billion.
Financial review
On Sept. 1, the company reported fiscal third-quarter earnings for the period ending July 31. Organic net sales increased 3% and adjusted operating income increased to 17%. The operating margin was 9.6% compared to an adjusted operating margin of 8.7% in the prior-year period.
Hormel appears to be one of the few companies to have successfully overcome inflationary and supply chain issues. In a statement, CEO Jim Snee said,"We continued to benefit from our balanced business model during the quarter, led by outstanding contributions from Jennie-O Turkey Store and Refrigerated Foods, The Jennie-O Turkey Store segment significantly outperformed our profit expectations for the quarter as the team managed limited turkey supply effectively and maximized operational performance. Refrigerated Foods delivered double-digit, value-added earnings growth on retail and foodservice items, more than offsetting lower commodity profitability. Similar to last quarter, impressive performance from these businesses helped mitigate higher input and supply chain costs across all segments. Earnings growth was also supported by the Planters snack nuts business, which continues to meet our expectations."
The company has $868 million in cash and equivalents as of quarter end as well as $3.3 billion in total debt. With estimated 2022 Ebitda of $1.5 billion, Hormel has a relatively low leverage ratio of 1.6 times.
Valuation
The company provided updated annual guidance during its third-quarter earnings release, which called for sales in the $12.2 billion to $12.8 billion range and earnings per share in the $1.78 to $1.85 range. At the midpoint of the earnings guidance, the company is selling at 25 times current year's earnings. The enterprise value/Ebitda ratio is in the high teens.
The GuruFocus discounted cash flow calculator produces a value much lower that today's price based on using future earnings per share of $2 as the starting point and a 10% long-term growth rate in earnings.
Hormel is considered a dividend aristocrat with 25 years of dividend increases. The current annualized dividend payment is $1.04, equating to a dividend yield of 2.21%, which is still above the S&P 500's dividend yield.
Guru trades
Gurus who have purchased Hormel stock recently include Ray Dalio (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies, while gurus who have sold or reduced their positions include Tom Russo (Trades, Portfolio) and Mairs and Power (Trades, Portfolio).
Conclusion
Hormel Foods is a well-managed company that has created a diversified product portfolio in recent years and reduced its reliance on pork and meat products. However, pork is still one of the largest input costs for the company.
Despite demonstrating strong growth rates, the stock appears to be overvalued and the valuations are too high to create a margin of safety. A lower entry point may be warranted, particularly when considering the current volatile market environment.
