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Hormel Foods (HRL) Benefits From Brand Strength, Costs High

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Hormel Foods Corporation (HRL - Free Report) looks well placed on the back of strength in its brands and product innovations. Moreover, the company’s focus on strategic acquisitions and efforts to enhance its capacity are noteworthy.

Impressively, the Zacks Consensus Estimate for Hormel Foods’ current fiscal year sales and earnings indicates an improvement of 2.7% and 6%, respectively, from the year-ago period’s levels. Notably, shares of this Zacks Rank #3 (Hold) company have gained 5% year to date against the industry’s decline of 8.3%.

Factors Working in Favor of Hormel Foods

Hormel Foods’ focus on product innovations is yielding results. During its fourth-quarter fiscal 2020 earnings call, management highlighted that the company achieved its goal of having 15% of sales from new products that were formed in the last five years. Even amid the coronavirus outbreak, Hormel Foods undertook development and, launches as well as boosted sales from new items. Notably, products such as Hormel Cup N' Crisp pepperoni and SKIPPY peanut butter squeeze packs among others are contributing to the upside. Well, the company is making advertisement investments to support growth of its brands. Additionally, it focuses on launching products to meet consumers’ preferences.


 

Hormel Foods intends to strengthen its business on the back of strategic acquisitions. In this regard, the company acquired a Texas-based pit-smoked meats company, Sadler's Smokehouse (completed on Mar 2, 2020). The buyout is in sync with Hormel Foods’ initiatives to strengthen position in foodservice.

Further, the Columbus (completed on Nov 27, 2017) and Fontanini (completed on Aug 17, 2017) buyouts are aiding performance. Also, the Ceratti acquisition (completed on Aug 24, 2017) is aiding the International segment. Notably, sales in the International & Other segment increased 8% to $157.2 million in fiscal fourth quarter.

Apart from these, Hormel Foods is on track with strategic investments for boosting capacity. During the fiscal fourth quarter, the company carried out the Burke pizza toppings plant expansion. Moreover, its facility expansion in Nevada and Iowa will be operational during the first quarter of fiscal 2021, providing the company additional capacity for pizza toppings. Also, Hormel Foods plans to open its new dry sausage manufacturing unit in Omaha, NE during the first half of 2021. Management also highlighted that it is focusing on expanding the capacity of its pepperoni business.

Hurdles on the Way

In spite of strong performance in Hormel Foods’ retail business, the company is seeing declines in its foodservice business amid the pandemic. This could be attributed to reduced demand from various foodservice venues in the wake of COVID-19 induced social distancing. During the fourth quarter of fiscal 2020, net sales in U.S. foodservice channel declined 23%.

Also, Hormel Foods’ has been seeing escalated costs associated with the pandemic. During fiscal 2020, the company absorbed more than $80 million in increased supply chain costs associated with COVID-19. These include costs related to lower production volumes, employee bonuses and expenses to ensure better safety measures in production units.

Nevertheless, we believe that the aforementioned upsides are likely keep aiding Hormel Foods’ performance.

Better-Ranked Food Stocks

United Natural Foods (UNFI - Free Report) , with a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 4.8%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

Blue Apron Holdings (APRN - Free Report) , with a Zacks Rank #2 (Buy), has a trailing four-quarter earnings surprise of 30.3%, on average.

The Hain Celestial (HAIN - Free Report) , with a Zacks Rank #2, has a trailing four-quarter earnings surprise of 24.6%, on average.

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