Hormel Foods Posts 3rd Quarter

The company misses expectations

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Hormel Foods Corp. (HRL, Financial), a producer and marketer of various meat and food products worldwide, released its financial results for the third quarter of fiscal 2017 before the opening bell on Aug. 24.

The company missed earnings expectations by three cents, posting EPS of 34 cents against the expected 37 cents. The miss generated a negative surprise of 8.1%.

Even though the pre-tax earnings results did not meet Hormel’s expectations due to high input costs for pork bellies and beef trim (two of the company’s primary raw materials), the company achieved record earnings of $278 million, which is a 1% increase from the comparable quarter of 2016.

In order "to mitigate the effects of volatile commodity markets," President and CEO Jim Snee said the company is working on "increased pricing, strategic promotional activity and continuing innovation efforts."

Third-quarter earnings were backed by revenue of $2.21 billion, a 3.9% decline year over year. The company missed revenue expectations by $30 million.

Refrigerated foods sales, which usually contributes approximately 48% to 50% of Hormel's total revenue, was down nearly 6% year over year due to the divestment of the Farmer John business. The company reported a robust growth in sales of all refrigerated food products.

Grocery products sales were up 5.67% to approximately $422 million, or 19.1% of the company’s total revenue. Jennie-O Turkey sales were down 8.6% to $369 million, or 16.7% of Hormel’s total revenue, as the store “continues to navigate through unfavorable market conditions in the turkey industry," Snee said. Sales of specialty foods declined 7.2% to approximately $197 million. or 8.9% of total revenue, due to weak quarterly sales of Muscle Milk. In addition, sales from the international segment were flat year over year with about $133 million, or 6% of total revenue.

In line with Hormel’s growth strategy, the company closed three strategic deals.

  • The purchase of Fontanini Italian Meats and Sausages provides Hormel with extra channels for its foodservice business’ growth.
  • The $104 million acquisition of the Ceratti brand will enable the company to further increase its global presence and explore the South American market for future acquisitions. Ceratti is a Brazilian meats company.
  • At the beginning of August, Hormel invested $130 million to expand the production of pre-cooked bacon at Dold Foods, a company facility in Wichita.

The company closed the third quarter with approximately $633.3 million in cash and securities. The total debt amounted to $250 million, which leads to a total debt-equity ratio of 5.26. The current ratio is 2.5, which indicates Hormel Foods is highly capable of meeting its short-term obligations using its liquidity and other current assets.

GuruFocus gives Hormel Foods an overall financial strength rating of 8 out of 10.

Due to higher input costs expected by the company for key raw materials and unfavorable market conditions in Turkey, Hormel lowered its EPS guidance for full fiscal 2017 to between $1.54 and $1.58.

GuruFocus gives Hormel Foods an overall profitability and growth rating of 8 out of 10.

Hormel allocated approximately 70% to 72% of its free cash flow to investments for the company’s growth and to pay dividends to shareholders, according to the payout ratio of 38.41%.

The company has paid a quarterly dividend to shareholders 356 times in a row. Hormel distributes an annual dividend of 68 cents through quarterly payments, for a dividend yield of 1.98%. The last dividend was paid on Aug. 15.

Hormel Foods is currently trading around $31.55 per share with a market capitalization of $17.93 billion, a price-book (P/B) ratio of 3.88, a price-sales (P/S) ratio of 1.95 and a price-earnings (P/E) ratio of 20.96. The forward P/E ratio is 18.83, the EPS forecasts for fiscal 2017 and 2018 are $1.65 and $1.71 and the analysts’ average target price per share is $38.40. The recommendation rating is 2.5 out of 5.

Disclosure: I have no positions in Hormel Foods.