Hormel Foods: P-grade food

Hormel Foods Corp. (HRL, Financial) is a consumer packaged food company that develops, processes and distributes a variety of meat, nut and food products to retail, foodservice, deli and commercial customers globally. It provides various perishable products such as fresh meats, frozen products, refrigerated meal solutions, sausages, hams, guacamoles and bacon. Shelf stable items include canned lunch meats, nut butters, nut snacks, peppers, microwave shelf stable meals, hashes, stews, tortillas, salsas and tortilla chips .

Major brands include SKIPPY, SPAM, Hormel, Natural Choice, Applegate, Justin’s, Jennie-O, Café H, Herdez, Black Label, Sadler’s, Columbus, Gatherings, Herdez, Wholly, Columbus, Planters, NUT-rition, Planters Cheez Balls and corn nuts.

The company recently reorganized into three separate operating segments, Retail, Foodservice and International. Earnings will be reported under this structure beginning in the first quarter of fiscal 2023.

Founded in 1891, the Austin, Minnesota-based company was previously known as Geo. A. Hormel & Co. and changed its name to Hormel Foods Corp. in January 1995. The company currently has a market capitalization of approximately $25 billion.

Financial analysis

On September 1, the company announced its fiscal third quarter results for the period ending July 31. Organic net sales increased 3% and adjusted operating income reached 17%. The operating margin was 9.6%, compared to an adjusted operating margin of 8.7% in the same period of the previous year.

Hormel appears to be one of the few companies that has managed to overcome inflation and supply chain issues. In a statement, CEO Jim Snee said, “We continued to benefit from our balanced business model during the quarter, with outstanding contributions from Jennie-O Turkey Store and Refrigerated Foods, the Jennie-O Turkey Store segment significantly exceeded our earnings expectations for the quarter as the team effectively managed the limited turkey supply and maximized operational performance. Chilled foods posted double-digit value-added profit growth on retail and foodservice items, which more than offset lower commodity profitability. Similar to last quarter, impressive performance from these companies helped to mitigate higher input and supply chain costs across all segments. Earnings growth was also supported by the Planters Snack Nuts business, which continues to meet our expectations.

The company had $868 million in cash and cash equivalents at the end of the quarter as well as total debt of $3.3 billion. With an estimated 2022 Ebitda of $1.5 billion, Hormel has a relatively low leverage ratio of 1.6 times.

Evaluation

The company provided updated full-year guidance when it released its third-quarter results, which forecast sales of $12.2 billion to $12.8 billion and earnings per share of 1.78 to 1. $85. Amid earnings guidance, the company is selling at 25 times current year earnings. The enterprise value/Ebitda ratio is in the high range.

The GuruFocus discounted cash flow calculator produces a value well below the current price using future earnings per share of $2 as a starting point and a long-term earnings growth rate of 10%.

Hormel is considered a dividend aristocrat with 25 years of increasing dividends. The current annualized dividend payout is $1.04, which equates to a dividend yield of 2.21%, which is still higher than the dividend yield of the S&P 500.

Guru professions

Gurus who recently bought Hormel shares include

Ray Dalio (Businesses, Portfolio) and

Jim Simons (Trades, Portfolio)’ Renaissance Technologies, while gurus who have sold or reduced their positions include

Tom Russo (Businesses, Portfolio) and

Mayors and power (Jobs, Portfolio).

Conclusion

Hormel Foods is a well-run company that has created a diverse product portfolio over the past few years and reduced its reliance on pork and meat products. However, pork remains one of the most important entry costs for the company.

Despite strong growth rates, the stock looks overvalued and valuations are too high to create a margin of safety. A lower entry point may be warranted, especially given the current volatile market environment.

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