Neutral on Hormel

We are maintaining our Neutral recommendation on Hormel Foods Corporation ( HRL - Analyst Report ) over the long term.

We are optimistic on the company’s strong fiscal third quarter 2012, which saw positive sales momentum. Hormel’s Grocery Products and Jennie-O Turkey Store witnessed improvement. Moreover, the increasing share of value-added branded products in Hormel’s product-mix strengthens our view on the stock.

Hormel’s balance sheet historically provides high returns, thus positioning it above other industry players like ConAgra Foods Inc. ( CAG - Analyst Report ) , Kraft Foods Inc. ( ) and Tyson Foods Inc. ( TSN - Analyst Report ) . The company is financially well positioned to pursue more strategic acquisitions, which are anticipated to strengthen its growth profile in the future. The company’s dividend declarationupholds its commitment toward returning value to its shareholders.

Hormel has a proven track record of successful acquisitions and integration of businesses over the years. Hormel’s retail business and branded stores continue to benefit from its investment on new advertising campaigns. Thus, such successful brand building and subsequent sales growth hold significant growth potential for the upcoming quarters.

However, our outlook is not completely free from risks. 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. Also, competition in the Grocery Products segment continues to remain a drag on profits.

Hormel’s operations and financial results are largely dependent on the cost and supply of raw material. As a result, constantly changing market forces of supply and demand remain nagging concerns. Moreover, a significant jump in pork cold storage charges, continue to impact pricing of processed meats.

Hormel’s strategy to grow through acquisitions, though promising, imposes several potential risks for the company. The cost of acquisition could impact its financial results. The risks associated with foreign operations such as government regulations, currency fluctuation cannot be overlooked.

Based in Austin, Minnesota, Hormel Foods Corporation is a leading manufacturer and marketer of various meat and food products in the United States and internationally. Hormel has a Zacks #3 Rank, which translates into a short-term (1-3 months) ‘Hold’ rating.