Hormel Foods Corporation – High Quality, Steady Growth

(Last Updated On: November 22, 2017)

Summary

  • HRL recently reported its FY2017 results and also announced its 52nd consecutive increase to its annual dividend.
  • Challenges persist in a couple of HRL’s divisions but its diversified portfolio of products and geographic presence mitigates some of the volatility.
  • Growth by acquisition continues with 2 acquisitions completed subsequent to July 2017 and another expected to close December 2017.
  • Shares are not inexpensive but you can typically expect to pay up when you invest in a high quality company with steady long-term growth potential.

Introduction

Subsequent to my Hormel Foods Corporation (NYSE: HRL) June 17, 2017 post and the addition of shares to the FFJ Portfolio, HRL acquired:

On October 31, 2017, two days subsequent to HRL’s 2017 fiscal year end, it was announced that HRL had entered into a definitive agreement to acquire Columbus Manufacturing Inc. for ~$0.85B. This represents the largest acquisition in HRL’s history.

This is an aggregate of ~$1.38B in recent acquisitions and is equivalent to ~22% of HRL’s Total Assets of $6.37B as at the previous fiscal year end (October 2016).

These recent acquisitions are in addition to the following acquisitions:

  • Wholly Guacamole in 2012 – $0.22B
  • Skippy Peanut Butter in 2013 – $0.7B
  • Muscle Milk in 2014 – $0.45B
  • Applegate organic deli meats in 2015 – $0.775B
  • Justin’s organic peanut butter in 2016 – $0.286B

These acquisitions are part of HRL’s plan to reduce the volatility in its business.

In this article I touch upon why HRL is a long-term hold for me.

Q4 2017 and FY2017 Results

Results can be accessed in the November 21, 2017 Form 8-K.

FY results were mixed with only the Grocery Products, Refrigerated Foods and International segments delivering record earnings despite one less week than in FY2016; Jenny-O Turkey Store and Specialty Products experienced challenges.

There continues to be an abundance of turkeys which is depressing prices. Management mentioned on its November 21 st conference call that there is no indication that the turkey prices have bottomed out. It is, however, cautiously optimistic market improvements will begin to materialize in the second half of FY2018.

The challenge is that the turkey industry is operating near breakeven. HRL, however, is well above break even. It has cut production and is of the opinion the rest of the industry needs to do that as well but this has not yet transpired.

In the interim, the value-added items are expected to grow. Jennie-O Lean Ground Turkey, for example, continues to show growth and take share from ground beef.

Specialty Products results disappointed with lower sales from its 2014 Muscle Milk ready-to-drink protein beverages acquisition. The necessary adjustments are currently being made by the new leadership team at CytoSport in order to gain back ground from this past year’s setback.

In addition, there is uncertainty in the hog and pork markets. While hog supplies are expected to grow moderately, HRL believes hog supplies are well-matched to industry capacity over the long-term. Short term volatility is expected, however, and is dependent on the progress of new plants ramping up to full production.

The fundamentals of refrigerated foods, however, have never been better. While management expects a reduction in the commodity profits and refrigerated foods, it expects continued growth in its value added businesses to more than offset the declines.

Goodwill and Intangible Assets have certainly ballooned over the past several years as a result of multiple acquisitions. The total as at FY2008 amounted to $0.771B. This now amounts to $3.147B and this is before the closing of the Columbus acquisition. Fortunately Goodwill impairment over the years has been negligible; $0.0215B was incurred in FY2015 but in the grand scheme of things this amount is negligible.

The most recent comprehensive details regarding Goodwill and Intangible Assets can be found in Note D on page 50 of HRL’s 2016 Annual Report.

The all important cash flow from operations was $0.449B, an increase of 34% from $0.371 in FY2016. This increase was primarily related to decreases in working capital. The recent acquisitions are also expected to enhance cash flow.

FY2018 Projections

Earlier this year during HRL’s the Investor Day, management indicated:

  • The game plan is to continue to evolve into a broader food company;
  • Acceleration of, and aggressive expansion, in the food service business will continue. The recent Fontanini acquisition is an example of this;
  • HRL is to become a more global food company. Examples of progress made on this front include the recent Cidade do Sol acquisition in Brazil and its new plant in China. HRL’s business in China is experiencing strong sales and earnings from SKIPPY peanut butter and from its branded meat products with HRL’s new Jiaxing client producing and shipping products. HRL’s manufacturing operations in China are now located in Beijing, Jiaxing, and Weifang.
  • Reduce volatility and increase balance by increasing sales of value added products as a percentage of total sales. The acquisition of purely value added businesses such as Fontanini, Cidade do Sol, and Columbus demonstrates HRL’s progress in this regard.
  • HRL is growing through acquisition but is also prepared to divest non-strategic assets.
  • The modernization of HRL’s supply chain.

The Grocery Products, Refrigerated Foods and International segments are expected to continue to drive growth as Jennie-O Turkey Store is expected to continue to experience challenging conditions.

HRL’s FY2018 guidance reflected below excludes the pending Columbus acquisition which is expected to close December. This acquisition would generate total sales of ~ $0.3B and would be $0.02 – $0.03 per share accretive to earnings in FY2018.

  • Net Sales Guidance: $9.4B – $9.8B
  • EPS Guidance:  $1.60 – $1.70

Dividends and Dividend Yield

HRL’s dividend history can be found here.

On November 20, 2017, HRL announced its 52 nd consecutive increase to its annual dividend. Effective February 15, 2018 shareholders will receive $0.1875/quarter; the annual dividend was raised to $0.75/share from $0.68/share.

The current dividend yield based on the November 21 st closing stock price of $34.52 is ~1.97% and the forward dividend yield is ~2.17%. While the yield is low, the consistency of the annual increase is what appeals to me. The compound annual growth rate of HRL’s dividend dating back to 1990 is just shy of 12%.

Valuation

The current mean FY2018 adjusted EPS estimate from various brokers is $1.64. There is, however, a significant disparity is earnings projections as reflected below.

Source: TD WebBroker

Management’s guidance is $1.60 – $1.70. If we use the low, mid, and high end of the range and the $34.52 closing stock price we get a PE of ~20.3, ~20.9, and ~21.6. While these valuation levels are superior to those in 2013 – 2016, they are several basis points higher than those evidenced in 2009 – 2012.

Source: Morningstar

Final Thoughts

HRL certainly has some challenges in a couple of its business lines. Fortunately, the diversification of its business has reduced volatility.

In my opinion, HRL is certainly not inexpensive at current levels. I do, however, view it as a high quality business that will reward me over the long-term. I acquired HRL shares a few months ago because I like the company’s consistency, growth potential, and quality and my opinion has not changed.

I wish you much success on your journey to financial freedom.

Thanks for reading!

Note: I sincerely appreciate the time you took to read this post. As always, please leave any feedback and questions you may have in the “Contact Me Here” section to the right.

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

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.

My Amazon picks.