Should You Take a Bite of Hormel Stock At Current Levels?

Source: Thinkstock

Source: Thinkstock

Hormel Foods Corporation (NYSE:HRL) is a household meat company. It also makes a killing in its sales and has returned value to shareholders as its stock has appreciated 62 percent in two years. The company processes, markets, and sells consumer branded meat but also other food products. The company operates in five segments and it is hard not to walk into a store and not see at least one of their products. The segments are Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and International & Other. The Grocery Products segment offers shelf-stable food products, including canned luncheon meats, shelf-stable microwaveable meals, stews, chilies, hash, meat spreads, flour and corn tortillas, salsas, and tortilla chips in the retail market. The Refrigerated Foods segment provides branded and unbranded pork and beef products for retail, foodservice, and fresh product customers.

The Jennie-O Turkey Store segment offers branded and unbranded turkey products for retail, foodservice, and fresh product customers. The Specialty Foods segment is involved in the packaging and sale of various sugar and sugar substitute products, salt and pepper products, liquid portion products, dessert mixes, ready-to-drink products, sports nutrition products, gelatin products, and private label canned meats to retail and foodservice customers. This segment also processes, markets, and sells nutritional food products and supplements to hospitals, nursing homes, and other marketers of nutritional products. The International and Other segment manufactures, markets, and sells its products internationally. With this company being as large as it is, is there room for growth and should it be in your portfolio?

Well, the company did see segment operating profit increase 14 percent in its last quarter compared to the comparable year ago quarter. It saw record diluted earnings per share of $0.52, up 13 percent from $0.46 per share in the year ago quarter. It further saw record dollar sales of $2.2 billion, up 4 percent although overall volume was down 1 percent. Each of Hormel’s segments performed exceptionally as well.

Grocery Products operating profit increased 16 percent, aided in part by a favorable comparison to fiscal 2013, which included Skippy peanut butter acquisition costs. Total segment sales were flat. Skippy peanut butter products, Hormel bacon toppings, and the Herdez line of products within itsMegaMex Foods joint venture delivered sales growth. Sales of its SPAM family of products and Hormel Compleats microwave meals declined in the second-quarter.

The Refrigerated Foods segment profit increased 38 percent. Higher pork operating margins offset elevated raw material costs in the value-added businesses. Sales for the quarter were up 10 percent, led by retail sales of Black Label bacon, HormelRev snack wraps, and Hormel Country Crock side dishes. Foodservice sales of Hormel FireBraised meats, Old Pecanwood Smoked Bacon, and Natural Choice deli meats also increased.

Jennie-O Turkey Store segment profit increased 2 percent last quarter. Strong commodity turkey prices and lower feed costs were offset by lower live production performance and higher fuel expenses from the extended harsh winter. Sales were down 1 percent with lower bird weights driving lower volumes. Sales of value-added products increased this quarter, including Jennie-O fresh lean ground turkey tray packs, turkey breakfast sausage, and turkey bacon.

The Specialty Foods segment was weak. It posted operating profits 26 percent lower than last year with a 12 percent decrease in sales. Lower segment results were largely due to the July 2013 expiration of the agreement allowing Diamond Crystal Brands to sell certain sugar substitutes into foodservice trade channels.

The International & Other segment continued to generate strong growth with segment profits up 34 percent and a sales increase of 23 percent. The China business delivered excellent results with growth in pork and the addition of Skippy peanut butter. Segment results were also driven by robust export sales. Jeffrey M. Ettinger, chair of the board, president, and chief executive officer, stated:

Our team achieved a record second-quarter both in terms of dollar sales and earnings per share. We improved operating profit margins on a total company basis and in four of our five segments. Beneficial pork operating margins and growth in our value-added foodservice business drove our Refrigerated Foods segment results. Our Grocery Products and International segments continued to deliver distribution gains with Skippy peanut butter this quarter. Favorable turkey commodity markets and growth in value-added product sales helped to mitigate lower live production results in our Jennie-O Turkey Store segment.

But should you buy the stock? It’s attractively priced for a company with growth at 23 times earnings. However, elevated pork, beef, turkey, and avocado costs, driven by tighter raw material supplies, are presently compressing margins on many of its value-added products. That said, the company maintained its fiscal 2014 guidance range of $2.17 to $2.27 per share, but expects these cost pressures to push its full year earnings toward the lower end of this range. With this outlook, at the present share price of $48.41, I rate Hormel as a hold and assign a $46 price target. I would, however, bless a buy if the stock dips below $42.

Disclosure: Christopher F. Davis holds no position in Hormel and has no plans to initiate a position in the next 72 hours. He has a hold rating on the stock and a $46 price target.

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