It’s Time To Snack On Hormel Foods Stock

Hormel Is Overpriced, But There’s A Reason

Hormel (NYSE:HRL) is by far one of the better consumer staples companies on the market. The downside for investors is that, with such a fine pedigree, it is a stock people want to own and that tends to keep share prices up. Trading at 27X this year’s and 26X next year’s earnings it is among the most highly-valued in the group but there is a reason. The company has one of the best portfolios of brands on the market, a robust presence in both the consumer and foodservice verticals, and a repositioning program that has it growing at a mid-single-digit rate organically with acquisitional growth on tap as well. In that light, the 27X earnings isn’t as high as could be which makes us think a reacceleration of HRL’s long-term uptrend is about to get underway.

Hormel Has Mixed Quarter, Outlook Good

Hormel had one of those mixed quarters that was only mixed because of the analysts. The company produced $2.46 billion in revenue, 3.4% more than this same time last year, and beat the consensus by 380 basis points but earnings were only as expected. Revenue was driven by strength in all four operating segments which also, coincidentally, returned to top-line growth as well.

On a segment basis, all four segments saw topline growth but most in the range of 1%. Both Grocery and International outpaced the group with gains of 7% and 13% despite a decline in total volume in the International segment. International results were driven by product-mix that shifted toward branded products and growth in emerging markets. In the U.S., the company reports retail is up 13%, deli 7%, and foodservice down 17% but there is a ray of light for the foodservice segment. The company says its seen a pick-up in order volume it believes foreshadows a recovery in the restaurant industry.

“We expect this steady improvement to continue throughout the year. We have been successful in a number of critical categories, and we will continue to make progress across the portfolio. Our retail business continued to perform extremely well, with sales increasing 13% for the quarter. Brands such as SPAM, SKIPPY, Hormel Chili, Hormel Black Label, AppleGate, Hormel Pepperoni, Lloyd's, Hormel Fully Cooked entrees, and Justin's all delivered very strong growth,” said CEO Jim Snee in the conference call.

Regarding earnings, the revenue gains did not carry through to the bottom line primarily due to the company’s increased tax rate and weakness/deleveraging in the Foodservice segment. The good news is that the Foodservice business is already picking up so margins should see a favorable impact as soon as the current quarter. Moving down to the bottom line, the $0.41 in reported revenue is down 9% from last year and only in-line with the consensus.

Hormel’s Free Cash Flow Rose 27%, The Dividend Is Safe

The great news for dividend-investors is that cash-from-operations is up 9% and FCF from operating is up 27%. This strengthens the already fortress-balance sheet and sets the company up well for a 21st increase at the end of the fiscal year. The last increase was only 5% but the long-term CAGR is above 10% and the income warrants it so we expect the 2022 increase to be in that range. Until then, investors can sit tight knowing the 2.0% yield is safe and sound.

The Technical Outlook: Hormel Is In A Long-Term Uptrend

Shares of Hormel made a strong rebound from the March 2020 low but ultimately spend the last year range-bound while others in the group made strong rallies. The difference may lay in the valuation, the cheapest stocks in the group trade near 10X earnings, but that trend may be over. Hormel is in a long-term, multi-year, secular uptrend driven by its continued success as a consumer staple leader. In that light, with growth accelerating, this stock is indeed a good buy.