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As the earnings season winds down, the focus shifts to stocks which are currently out of favor. Stock categories such as consumer staples have remained relatively subdued this year, given that more growth oriented stocks have notched up record gains. But with markets relatively subdued at this point, attention has shifted toward these stock classes once again.   

Coming to the meat products industry, this category remains a firm consumer favorite and a major category for the food industry as a whole. A new report from market research firm Packaged Facts indicates total retail sales for the category will touch $100 billion by 2021. At the same time, the industry also faces several challenges as consumer awareness about ecology, health issues and economic impact grows.

With Hormel Foods Corp. (HRL - Free Report) and Sanderson Farms, Inc. (SAFM - Free Report) both scheduled to report on May 25, this may be a good time to consider which of these is a better stock. Both stocks carry a Zacks Rank #3 (Hold) rating. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Other major earnings scheduled at this time include Lowe's Companies, Inc. (LOW - Free Report) and Medtronic plc (MDT - Free Report) . 

Price Performance

While the Zacks Food – Meat Products Industry has gained 1.8%, Hormel Foods has inched up by 0.1% year to date. Here, Sanderson Farms stands out, since it has surged 22.3% over the same period.

Valuation

The most appropriate ratio to evaluate these two drug makers is EV/EBITDA. This metric is usually used to compare two stocks within the same industry. It is superior to other metrics such as P/E because it is not affected by the different capital structures of the two companies. While Sanderson Farms is focused on chicken products, Hormel Foods has other major product lines such as turkey and pork.

First, it is important to consider where the industry as a whole stands from a valuation perspective. Here, we can see that with an EV/EBITDA of 9.62, the meat products industry is significantly undervalued compared to the S&P 500, which has a value of 10.57.

Coming to the two meat products producers, with an EV/EBITDA value of 12.44, Hormel is overvalued relative to the rest of the industry. On the other hand, Sanderson Farms holds the edge here with a lower EV/EBITDA value of 5.80, making it undervalued relative to the rest of the industry.

Dividend Yield

In the last year, Sanderson Farms offered a dividend yield of 0.8%, which was lower than the broader industry’s level of 1.5%. In contrast, Hormel Foods offers a dividend yield of nearly 2%, making the larger company this round’s undisputed winner.

Return on Invested Capital

Broadly speaking, the consumer staples sector is characterized by high level of return on equity (ROE), and the meat products industry is no different. This is because consumer staples have outperformed the market for an extremely long period. This is why it is wrong to focus on ROEs when determining which stock is superior. Instead, return on invested capital (ROIC) is a better indicator of the profitability of a company.

Both Hormel and Sanderson Farms have outperformed the industry, which has an ROIC level of 9.2%, on this count. However, Sanderson Farms outperforms Hormel since its ROIC is comparatively higher at 13.6%, compared to its rival’s level of 12.2%.  

Earnings History, ESP and Estimate Revisions

Considering a more comprehensive earnings history, Hormel Foods has delivered positive surprises in two of the prior four quarters with an average earnings surprise of 1.2%. In comparison, Sanderson Farms delivered an earnings beat in three of the trailing four quarters, with an average positive earnings surprise of 15.8%.

Even when considering Earnings ESP, Sanderson Farms is the superior stock. Its ESP value of +6.91% exceeds Hormel Foods level of +0.00%. Additionally, Sanderson Farm’s earnings estimate for the current year has increased by 8.9% over the last 30 days, compared to Hormel Food’s increase of 0.2%.

Conclusion

Our comparative analysis shows that Hormel Foods holds an edge over Sanderson Farms only when considering dividend yields. However, when considering EV/EBITDA, ROIC, estimate revisions and a more comprehensive look at its previous earnings performance, Sanderson Farms is clearly a better stock.

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