Hormel Foods, the maker of SPAM and Skippy Peanut Butter, released its Q3 results on August 23. This article is an update to my February 22 and May 24 articles.

 

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’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 While several brands have a long history in the North American market this does not necessarily mean these brands are outdated.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).

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