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Hormel Foods' (HRL) Portfolio Solid, Turkey Trade a Woe

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We issued an updated research report on premium meat products company, Hormel Foods Corporation (HRL - Free Report) , on May 28. The company currently carries a Zacks Rank #3 (Hold) but flaunts an attractive VGM Score of A. Strong demand for on-trend branded products is supporting the company’s growth, however, prevalent turkey market challenges remains a headwind.

Let’s dig deeper into the basic fundamental factors affecting the stock.

Factors Favoring the Stock

Improving demand for popular brands like Hormel Black Label bacon, SPAM, Muscle Milk and Wholly Guacamole dips is currently driving Hormel Foods revenues. Moreover, the company expects that the Make the Switch campaign this summer will bolster sales of its value-added businesses in the second half of fiscal 2018.

The company also intends to strengthen its business on the back of strategic acquisitions. Successful integration of the Fontanini and Columbus buyouts are expected to strengthen Hormel Foods’ business portfolio, going forward.

Hormel Foods has been boosting its liquidity on the back of reduced corporate tax rates. In first-half fiscal 2018, the company generated operating cash flows of $443 million, up 58% from the year-ago period, on grounds of lower taxes. Notably, Hormel Foods narrowed its fiscal 2018 tax rate to 17.5-19.5%, from the prior fiscal’s 33.2%, and anticipates to generate cash flow benefit of $100-$140 million in the current fiscal. The company intends to finance its new marketing and capital investment projects with these proceeds.

Over the last three months, Hormel Foods shares have rallied 10.8%, as against the 2.1% loss recorded by the industry.

Existing Setbacks

Turkey market challenges have been hurting revenues and profitability of Hormel Foods’ Jennie-O Turkey Store segment for the past few quarters. The company noted that a supply glut has been affecting the prices of turkey and cold storage meat. Notably, soaring freight expenses and elevated advertising costs also weighed over the segment’s bottom line in second-quarter fiscal 2018. The company stated that surge in fuel prices and scarcity of trucks will continue to escalate freight costs until fiscal 2019.

Hormel Foods’ margins are also vulnerable to input price fluctuations. For instance, inflation in the prices of pork bellies and beef trim marred the company’s profitability in fourth-quarter fiscal 2017. In addition, volatilities in the prices of beef, hog and hog sport trim pulled down its margins in first-quarter fiscal 2018. In the fiscal second quarter, Hormel Foods experienced inflation in beef prices and anticipates the same to persist through the remaining of the current fiscal. Moreover, uncertain impact of tariffs on the pork industry remains a major cause of concern.

Stocks to Consider

Some better-ranked stocks in the Zacks Consumer Staples sector are listed below:

B&G Foods, Inc. (BGS - Free Report) currently carries a Zacks Rank #2 (Buy). The company pulled off an average positive earnings surprise of 0.68% in the past four quarters. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Conagra Brands, Inc. (CAG - Free Report) also holds a Zacks Rank of 2. The company delivered an average positive earnings surprise of 6.73% over the past four quarters.

Church & Dwight Co., Inc. (CHD - Free Report) also carries a Zacks Rank of 2, at present. The company came up with an average positive earnings surprise of 4.17% over the trailing four quarters.

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