With a 3-month gain of 4.19% and an Earnings Per Share (EPS) (EPS) of 1.71, despite a day's loss of -2.85%, Hormel Foods Corp (HRL, Financial) has sparked interest among value investors. The question that arises is whether the stock is modestly undervalued. This article aims to provide a comprehensive valuation analysis of Hormel Foods (HRL), encouraging readers to delve into the following insightful analysis.
Introducing Hormel Foods Corp (HRL, Financial)
Hormel Foods, a company with a rich history of meat-focused offerings, has evolved into a branded food company with a diverse protein lineup. The company's products are sold through multiple channels, including U.S. retail, U.S. food service, and international markets. Major brands under Hormel Foods include Hormel, Spam, Jennie-O, Columbus, Applegate, Planters, and Skippy, many of which hold the number one or two market share in their respective categories.
Comparing the stock price of Hormel Foods (HRL, Financial) with its GF Value, an estimation of fair value, provides an initial perspective on the company's value. This comparison serves as a foundation for a deeper exploration into the company's financial health and potential for future growth.
Understanding the GF Value of Hormel Foods (HRL, Financial)
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on historical trading multiples, a GuruFocus adjustment factor based on the company's past performance and growth, and future business performance estimates. The GF Value Line, displayed on the summary page, provides an overview of the fair value at which the stock should ideally be traded.
According to the GF Value, Hormel Foods (HRL, Financial) appears to be modestly undervalued. The stock's fair value is estimated considering three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued, implying poor future returns. Conversely, if the share price is significantly below the GF Value Line, the stock may be undervalued, suggesting higher future returns. At its current price of $ 38.53 per share, Hormel Foods stock shows signs of being modestly undervalued.
Given its relative undervaluation, the long-term return of Hormel Foods stock is likely to be higher than its business growth.
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Assessing the Financial Strength of Hormel Foods (HRL, Financial)
Investing in companies with low financial strength could result in permanent capital loss, making it crucial for investors to review a company's financial strength before buying shares. A good initial perspective on the company's financial strength can be gained by looking at the cash-to-debt ratio and interest coverage. Hormel Foods has a cash-to-debt ratio of 0.18, ranking worse than 68.85% of 1801 companies in the Consumer Packaged Goods industry. Based on this, GuruFocus ranks Hormel Foods's financial strength as 7 out of 10, suggesting a fair balance sheet.
Evaluating the Profitability and Growth of Hormel Foods (HRL, Financial)
Investing in profitable companies, especially those with consistent profitability over the long term, is generally less risky. A company with high profit margins is usually a safer investment than those with low profit margins. Hormel Foods has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $12.30 billion and Earnings Per Share (EPS) of $1.71. Its operating margin is 9.76%, which ranks better than 73.1% of 1818 companies in the Consumer Packaged Goods industry. Overall, the profitability of Hormel Foods is ranked 8 out of 10, indicating strong profitability.
Growth is a crucial factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long-term stock performance of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Hormel Foods is 9.2%, ranking better than 60.12% of 1715 companies in the Consumer Packaged Goods industry. However, the 3-year average EBITDA growth rate is 4.5%, ranking worse than 52.86% of 1521 companies in the same industry.
Comparing ROIC and WACC of Hormel Foods (HRL, Financial)
Another method of determining the profitability of a company is to compare its return on invested capital (ROIC) to the weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Hormel Foods's return on invested capital is 8.2, and its cost of capital is 5.69.
Conclusion
Overall, Hormel Foods (HRL, Financial) stock appears to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks worse than 52.86% of 1521 companies in the Consumer Packaged Goods industry. To learn more about Hormel Foods stock, you can check out its 30-Year Financials here.
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