High-Quality, High-Yield Hormel Looks Tasty at These Levels

Key Points

• Hormel issued a mixed report that was strong where it counts — the bottom line. 
• The bottom is in for the market but it may have a hard time moving higher from here. 
• The analysts support the stock but are not leading it higher. 

The downtrend in Hormel Foods Co. NYSE: HRL is over. The stock has bottomed after a year of moving lower under the pressure of margin contraction and analysts' revisions. Hormel stock reached the bottom earlier this year, confirmed now that second-quarter results are in. The takeaway from the report is that the company has made progress on key objectives, resulting in operational improvements, increased profitability and guidance. What this means for investors is stabilized price action in a high-yield Dividend King. 

A Dividend King is a company that has raised its distribution annually for at least 50 years — a telling indication of corporate health. Hormel has increased its dividend for 57 years and has the power to continue raising it despite the recent earnings pressure.

The current payout is running near 60% of earnings, which is low for a dividend-growing company with a long history of increases. The outlook for earnings is brightening, improving the outlook for dividend stability and upward price movement. 

Hormel Has Mixed Quarter, Shares Surge 

Hormel had a mixed quarter, with volume declines offsetting pricing increases and top-line results falling short of the estimates. The $3 billion in revenue is down 3.2% compared to last year and missed the consensus estimate by $0.060 billion. That's worth 200 basis points to the top line, but improved efficiency offsets the miss. On a segment basis, retail fell the hardest and is down 7% compared to last year. International and food service saw net sales fall 3%. 

The margin news is good and helping to lift the stock. The company's margins contracted significantly in the retail and international segments but were offset by strength in the food service business. Foodservice profits rose 7% versus the 3% decline in sales, and the company saw strength on the bottom line. The operating margin came in at 9.9%, down 90 bps year-over-year (YoY) but up 20 bps sequentially and expected to show additional improvement in the second half as company efforts gain traction. The GAAP EPS came in at 40 cents and is down YoY but a penny or 250 bps above consensus.

The company didn't raise its guidance, but it was able to maintain guidance, which is a change from prior quarters when guidance lowered. As it is, the company is expecting 1% to 3% top-line growth with EPS in a range of $1.70 to $1.82 compared to the $1.73 consensus figure. That puts the consensus below the midpoint and may spark upward revisions to the analysts' earnings outlook. 

The Analysts: Holding Hormel but May Cap Gains 

The five analysts with current ratings currently "hold" Hormel, but their activity may cap gains in the second half. The consensus figure is about 9% above the price action but trending lower, and the first new target to show up post-release is a downward revision. That's from Barclay's, which pegged the stock at $42, compared to the $43.70 consensus average. If more analysts come out with price target increases, it is unlikely Hormel will stage a rally this year, but it will continue to pay its 2.75% dividend. 

The Technical Outlook: Hormel is at the Bottom

Is Hormel stock a good buy? Shares of Hormel are bouncing from their bottom and may move higher, but there is significant resistance at the $41 level. If the market cannot reach that level soon, it may become range-bound. In that scenario, the stock could trend sideways at current levels until later in the year or even into 2024.