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Hormel – A Fairly Valued Consumer Staples Sector Member

This is an introduction to my Hormel Foods Corporation (HRL) stock analysis which is based on Q2 2018 results and management's guidance for the second half of FY2018.

Summary

  • HRL, as with other companies in the Consumer Staples sector, is experiencing headwinds such as changing consumer tastes.
  • Its stock price has not been negatively impacted to the same extent as other members of this sector.
  • HRL Investors have not experienced significant positive investment returns over the last couple of years. They have, however, been aptly rewarded if they have held their HRL shares over the long-term.
  • Shares are currently fairly valued.

Introduction

In my June 17, 2017 Hormel Foods Corporation (NYSE: HRL) article I indicated that I had initiated a position in HRL for the FFJ Portfolio; I acquired 400 shares and established the automatic reinvestment of all dividends.

In hindsight, I was about 2 months premature with my purchase as I could have picked up shares for ~$3 less per share. I don’t get too worked up over this, however, since I make investments with the long-term in mind. I strongly suspect that 10 – 20 years into the future I won’t get hung up about having ‘overpaid’.

The rationale for my HRL purchase was to increase my exposure to the Consumer Staples sector. Participants within this sector (a list of participants can be found in the iShares Global Consumer Staples ETF) are certainly weathering an extremely difficult environment. Organic growth is abysmal, freight costs have appreciated significantly, input costs have increased at a faster rate than industry participants can reasonably expect to recover from customers (participants no longer enjoy the pricing power to which they were accustomed), and consumer preferences have changed as an increasing number of consumers are making ‘healthier choices’.

Given the above, industry participants have been divesting certain aspects of their business and have been making strategic acquisitions to reposition themselves to take advantage of growth areas. I have discussed this in my recent Procter & Gamble and General Mills articles; I do not have exposure to these companies and currently have no intention of initiating a position in either company.

In addition, companies have increasingly resorted to financial engineering. Low priced debt has been taken on to make these acquisitions and also to repurchase shares and to increase dividend distributions. While taking on low cost debt for such purposes may work in the short-term it is not a strategy that is sustainable. At some stage, debt levels reach a stage where ratings agencies start to downgrade credit ratings.

Furthermore, at some stage this debt must be refinanced and/or repaid. I have noted in previous articles about my reluctance to invest in a business that relies heavily on debt as it adds another layer of concern. I am a reasonably risk averse investor who gets an uncomfortable feeling when the company in which I have invested must refinance its debt during a period of adversity.

NOTE: I also encourage you to review my November 22, 2017 and February 22, 2018 articles.

Please click here to read my HRL stock analysis.

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By |May 24th, 2018|General Investing|Comments Off on Hormel – A Fairly Valued Consumer Staples Sector Member

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