Hormel Foods Corporation (HRL) is a member of the exclusive group of Dividend Kings (dividend increases for at least 50 consecutive years). This article looks at valuation based on Q1 2019 results and FY2019 guidance.
- Hormel Foods has just released Q1 2019 results and has reaffirmed FY2019 guidance of $1.77 - $1.91 per share.
- Following a Goodwill write-down in Q4 2018 resulting from the deterioration in the CytoSport business which was acquired in FY2014, HRL has entered into a definitive agreement to sell this business to PepsiCo.
- HRL is seeing the benefits from its long-term strategy to move its portfolio away from low margin commodities to higher margin branded value added products.
- HRL will not appeal to growth inclined investors but may appeal to value investors.
Investors seeking to invest in ‘Value’ companies may find Hormel Foods Corp. (HRL) to be an attractive long-term investment. Founded in 1891, this Consumer Goods company has a suite of well known brands; HRL’s brands have a #1 or #2 marketshare in over 40 categories which is an increase from 35 a year ago.
HRL is a member of the highly exclusive ‘Dividend King’ group of companies. These are companies which have increased their dividend for at least 50 consecutive years.
In addition to a steadily increasing dividend, we see that HRL’s 5 year cumulative return (October 2013 - October 2018) exceeds a couple of indices.
If you view a 5 year timeframe as too short in which to properly assess a company’s performance, let’s have a look at 10 years.
How about 15 years?
HRL certainly has rewarded shareholders over the long-term. I still, however, like to see whether I am acquiring shares when they are fairly valued. Far too often I have seen investors acquire shares in a company when shares are trading at a lofty valuation because they look at a company’s historical track record and think what happened in the past will be replicated in the future.
I have provided examples on this matter in previous articles and once again suggest you look at how Cisco (CSCO) and Intel (INTC) shareholders have fared depending on when shares were acquired.
I acquired CSCO shares at an average cost of just under $20. Had I acquired CSCO shares in 1999 – early 2000 my investment experience with CSCO would be entirely different from that I have experienced.
When I acquired HRL shares in June 2017 I wrote that I viewed HRL as being attractively valued. I was of the same opinion when I wrote my November 2017, February 2018, and May 2018 articles.
My sentiment changed slightly when I wrote my August 28, 2018 article. In that article I indicated I was of the opinion HRL was fairly valued versus attractively valued.
By the time I wrote my November 20, 2018 article I was of the opinion HRL (trading at $44.50) did not warrant its current valuation. My ‘Final Thoughts’ in that article were:
‘My modus operandi is such that I buy and hold shares for the long-term and very rarely do I sell shares….even though they may be slightly overvalued.
I have sufficient exposure to HRL (shares are held in the FFJ Portfolio) but if this were not the case I still would not acquire shares at the current valuation. I would patiently wait for Mr. Market to sour on HRL to the point where shares retrace to sub $39.’
We now have Q1 2019 results released on February 21, 2019 and a reaffirmation of full-year diluted EPS guidance of $1.77 - $1.91 per share ($1.84 mid-point).
Interestingly, just a couple of days before the release of Q1 results, HRL announced that it had entered into a definitive agreement to sell its CytoSport business to PepsiCo, Inc. (PEP); PEP has been a long-standing distribution partner for CytoSport which puts them in a strong position to grow this business. Closing of this transaction is expected to occur in Q2.
In my November 20, 2018 article I indicated that HRL had recorded a $17.279 million non-cash impairment charge associated with the CytoSport business it acquired in August 2014 for $0.45B; CytoSport was generating annual sales of $0.37B.
This acquisition was to serve as a growth catalyst for HRL’s Specialty Foods segment and to help expand HRL’s offerings of portable, immediate, protein-rich foods.
Fast forward to FY2018, however, and with $0.3B in annual sales it is clear this acquisition did not go as planned. In my November 20, 2018 article I indicated ‘this goes to show how growth by acquisition can be risky.’
Fortunately, HRL will extricate itself from CytoSport with the business to be sold for $0.465B which is $15 million higher than the purchase price. When you factor in all the costs associated with this acquisition, the time value of money, and the opportunity cost of having had money tied up in this business for ~4.5 years, this acquisition has been a destruction of shareholder value.
With the release of HRL’s Q1 2019 results and a pull back in the share price from ~$46 reached in November 2018 to $41.86, let’s have a look at whether HRL presents an attractive buying opportunity for investors seeking steady dividend growth and, for the most part, relatively minor fluctuations in the stock price. (cont’d.)
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Disclosure: I am long HRL.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.