Summary

  • HRL is transitioning from low margin commodity related businesses to higher margin branded value added products.
  • Brands with a long history in North American markets are being well received in international markets.
  • HRL is one of a handful of companies which has increased its dividend for 50+ consecutive years.
  • The dividend yield is low but that is because HRL retains profits to fund its acquisitions.
  • HRL’s stock price is unlikely to experience the same level of volatility as many highly valued stocks should we ever get a long overdue market correction.
  • It is less attractively valued as at the time of my February and May articles.

Introduction

In my November 22, February 22, and May 24 articles I indicated Hormel Foods Corp. (NYSE: HRL) was attractively valued. In this article I revisit HRL to determine whether this is still the case after the subsequent run-up in the stock price.

HRL - 3 month stock chart ending August 27 2018

HRL’s critics will argue that it has its share of tired and less than healthy brands (eg. SPAM). While several brands have a long history in the North American market this does not necessarily mean these brands are outdated. There are several fast growing and heavily populated foreign markets in which HRL’s products are being well received.

In 2013, HRL specifically acquired the Skippy peanut butter business in China from Unilever United States Inc. because it was the #1 peanut butter brand in China. By owning the Skippy brand in China, HRL knew it would be able to leverage this to help in the distribution of SPAM in China. This acquisition is paying off as in the Q3 analyst call management indicated:

‘Our International segment delivered sales growth of 11% on a volume increase of 9%. Sales increased on stronger exports of SPAM luncheon meat and Skippy peanut butter, favorable results in China, and the addition of the Ceratti business in Brazil. We continue to gain momentum in China as we grow distribution for our SPAM family of products.’

HRL is certainly not a company that has captivated investor interest to the same extent as other companies (eg. FANG, cannabis). Quite frankly, I am pleased that HRL’s CEO is not constantly in the media.

It is also not in the habit of beating consensus earnings estimates by a penny on a quarterly basis. HRL will beat / miss estimates by a wide margin. This suggests to me that management is not motivated to pull accounting levers to play the earnings estimates game. Perhaps this is the case because The Hormel Foundation controls more than 48% of HRL’s stock and the charity relies very heavily on HRL to keep growing earnings over the long-term.

Looking at the Foundation’s website I see it is specifically stated that the Foundation would vote against any proposal to purchase the Corporation. As a result, management is highly unlikely to be distracted by activist investors and can focus their time and energy on managing the business versus beating quarterly estimates.

In my opinion, HRL is the type of company you hold in a well diversified portfolio knowing that its low volatility will counteract more volatile holdings.

In addition, HRL is a company worthy of consideration if you are seeking to generate an increasing stream of dividend income; HRL is one of the very few Dividend Kings (50+ consecutive years of dividend increases).

Q3 2018 Financial Results and FY Guidance

HRL’s Q3 results can be found in the August 23 Earnings Release. The transcript of the earnings call with analysts in which HRL’s Chairman, President & CEO and SVP & CFO discuss Q3 results and outlook can be found here.

HRL - Q3 2018 Performance Review

HRL reported record sales and earnings for the quarter and management is confident it will be able to deliver on its full year earnings guidance range despite uncertainty surrounding exports (ie. impact from multiple rounds of tariffs and recent animal health issues in China).

The low margin commodity related businesses have been a challenge but management is executing on its long-term strategy to move the portfolio away from low margin commodities to higher margin branded value added products.

As part of this ongoing strategy, HRL has sold its Fremont pork processing facility with details provided in the transcript of the Q3 earnings call.

While management has revised full year Net Sales guidance from $9.7B - $10.1B to $9.4B - $9.6B, EPS guidance remains at $1.81 - $1.95.

Credit Ratings

HRL’s credit ratings remain unchanged from those reflected in my May 24 article. Moody’s rates HRL’s senior unsecured debt A1 and Standard & Poor’s continues to assign an A rating.

Valuation

At $37.94/share, HRL’s forward PE is ~19.4 - ~20.96 based on EPS guidance. This is higher than the ~18.2 - ~19.6 range at the time of my May 24 article and the ~16.9 - ~18.2 range at the time of my February 22 article.

If we take the mid-point of the EPS guidance of $1.81 - $1.95 we get $1.88. If earnings grow a conservative 6% in FY2019, we can expect HRL to generate EPS of ~$2. With a current $37.94 stock price we get a forward PE of ~19.

HRL’s 5 year average PE is ~23.7. If we conservatively presume HRL’s PE will expand to 21, then we should expect HRL’s stock price to be ~$42 in FY2019.

Dividend and Dividend Yield

HRL’s dividend ($0.1875/quarter dividend, $0.75/annually) and stock split histories can be found here.

At the time of my May 24 article, HRL’s dividend yield was ~2.1% and at the time of my February 22 article the dividend yield was ~2.27%.

With HRL trading at $37.94, the dividend yield has dropped to ~1.98%.

This low dividend yield will dissuade some investors from investing in HRL. Investors should remember, however, that HRL intentionally pays a relatively low dividend. This allows it to use cash to acquire businesses or brands which is why there is a relatively low level of long-term debt on the balance sheet (refer financials found in the Q3 2018 Earnings Release).

Final Thoughts

HRL is not as attractively valued as it was when I wrote my previous articles. I now view it as fairly valued versus attractively valued. It does, however, still warrant a ‘buy’ recommendation for long-term investors seeking an equity holding that is unlikely to experience wild fluctuations in price should the long overdue market correction ever occur.

I hope you enjoyed this post and 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 article. Please send any feedback, corrections, or questions to [email protected]

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.