Hormel Looks Cheap At These Levels

Hormel (NYSE: HRL)  is not the cheapest pick in the consumer staples sector (NYSEARCA: XLP) but it is one of the better values. The stock trades at 25X its earnings compared to 15X at the low end of the range with Kraft-Heinz (NASDAQ: KHC) and upwards of 28X to 30X for names like Clorox (NYSE: CLX) and Lamb Weston (NYSE: LW) and so a fair value at least. Looking at the stock from the technical perspective, Hormel has been in a prolonged and protracted uptrend that is still intact and it is now approaching a key level. An uptrend line that has been in play for 14 years crosses a strong support level at the $44.50 level and suggests the next buying opportunity is at hand. A drop to this level should trigger another round of buying in this name and one that could easily send it up to a new all-time high. 

Hormel Results Pressured By Inflation  

Hormel had another good quarter but there are two things weighing on the price action in the wake of the earnings report. The first is the results, although another record quarter of revenue and 5.9% better than last year, is only in-line with the Marketbeat.com consensus figures. The revenue beat the consensus by a slim margin while the earnings missed by a slim margin under the pressure of ongoing supply chain disruption and inflation. On a channel basis, US Foodservice led with growth of 14% but was offset by weaker growth in US retail and a 13% decline in the International business. On a segment basis, results were mixed with strength in the Grocery and Jennie-Turkey Store. Volume declined across most segments but grew in Grocery while Jennie-O benefited from low turkey availability and increased efficiency. 

Moving down to the earnings the news is both good and bad. The good news is that the margin expanded in all comparisons and led to 25% GAAP earnings growth and 3% adjusted. The bad news is that margin did not expand as much as expected and missed by enough to offset the revenue strength. The $0.40 in GAAP earnings is up from last year but missed by a penny and margin pressure is present in the guidance as well. Hormel reports positive price pass-throughs are supporting revenue growth and raised the revenue guidance because of it but the earnings outlook is not as good. The company not only narrowed but lowered the outlook for EPS to a range that is below the consensus figure. The new guidance has no bearing on the dividend health but will weigh on the price action in the near term at least. 

Hormel Is On Track For Dividend Growth

Hormel yields about 2.20% with shares near $47.50. That’s a far cry below the 4.25% paid by Kraft Heinz and well below the 3.35% paid by Clorox but it comes with a far-better outlook for growth. Hormel has been raising its dividend for the last 56 years and is paying out only 55% of its earnings while Clorox, which has been increasing its payout for more than 40 years, is showing signs of distress. Its payout ratio has been running above 100% for the last year or so which is a red flag at the very least. Clorox may prove resilient and work out of its slump but it may not. Kraft Heinz, on the other hand, may begin increasing its dividend any quarter now but there is no guarantee that it will. Until then, investors can bank on Hormel’s outlook and 9% distribution CAGR. 

The Technical Outlook: Hormel Falls To Support 

Shares of Hormel fell in the wake of the Q3 report but may have already found support at the 150-day EMA. Price action is bouncing from this level the day after the report was released but it may be short-lived. If price action falls below the EMA a move down to the trend line near $44.50 is expected. If the EMA holds up as support, however, Hormel may resume the uptrend without a touch on the trendline.