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Analyst Blog

On Sep 3, 2013, we reiterated our Neutral recommendation on Hormel Foods Corporation (HRL - Analyst Report), based on the company’s future growth potential.

Why the Retention?

Hormel reported mixed results for the third quarter of fiscal 2013. While earnings per share of 42 cents missed the Zacks Consensus Estimate of 44 cents by 4.5%, revenues of $2,159.5 million beat the Zacks Consensus Estimate of $2,127.0 million. The year-over-year increase in revenues was mainly led by increase in contribution from all segments, accompanied by the recently acquired Skippy peanut butter line. Higher expenditures impacted margins as well as earnings in the quarter.

Hormel’s diversified portfolio helps it to balance the profits and losses of its segments. The company’s Refrigerated Foods segment’s operating profit declined 26.3% year over year, due to higher raw materials costs. However, the same could not pull down the total margins significantly due to hikes in other segment’s operating margins.

The company has also been attaining success with respect to acquisitions. Hormel’s Skippy peanut butter line’s sales increased in the reported quarter due to improved distribution. Moreover, the company has plans to acquire the China operations of Skippy in the current fiscal year.

Hormel has spent over $20 million a year on advertisements in the past two fiscal years. The expenses were utilized for the advertisement of burgers and turkey bacon, which resulted in a double-digit sales hike for these products.

However, the increasing costs as well as reducing supply of the raw materials like pork, poultry and feed grains along with other products have been impacting the company’s margins for quite some time. Moreover, due to low entry barriers in the meat and food products market, Hormel faces stiff competition from national and regional producers of other meat and protein sources as well as from the manufacturers of pork and turkey products.

Other Stocks to Consider

Hormel currently carries a Zacks Rank #3 (Hold). Other stocks worth a look in the industry include Pilgrim's Pride Corporation (PPC - Snapshot Report), Smithfield Foods, Inc. and Tyson Foods, Inc. (TSN - Analyst Report). While Pilgrim's Pride carries a Zacks Rank #1 (Strong Buy), Smithfield Foods and Tyson Foods carry a Zacks Rank #2 (Buy).

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