Summary

  • On February 22, 2018 HRL released its Q1 2018 results and increased FY2018 EPS guidance.
  • Q1 2018 reported revenue growth in the Grocery Products: $613.87M (+1%), Refrigerated Foods: $1.18B (+5%), International & Other: $150.32M (+19%) segments but Commodity turkey breast markets remain at multi-year lows thus resulting in weak results at Jennie-O Turkey Store: $390.65M (-7%).
  • The Tax Cuts and Jobs Act (TJC) is expected to reduce HRL’s FY2018 effective tax rate to 17.5% - 20.5% versus the original 32.3% - 33.3% guidance.
  • While Net Annual Sales guidance remains at $9.7B - $10.10B, diluted EPS guidance has been revised to $1.81 - $1.95 from $1.62 - $1.72 as a result of the TJC.

Introduction

On February 22, 2018, Hormel (NYSE: HRL) released its Q1 2018 results and provided revised diluted EPS guidance for FY2018 to reflect the positive impact from the recent legislative tax changes.

Previous HRL related articles were published June 17, 2017 and November 22, 2017.

About

HRL was founded in 1891 in Austin, Minnesota, as Geo. A. Hormel & Company. It started as a processor of meat and food products and continues in this line of business. On January 31, 1995, the company’s name was changed to Hormel Foods Corporation.

HRL is primarily engaged in the production of a variety of meat and food products and in the marketing of those products throughout the US and various international regions. While pork and turkey remain the major raw materials for its products, HRL has evolved over the years to become a manufacturer and distributor of branded, value-added consumer items as opposed to being solely in the commodity fresh meat business.

HRL’s product portfolio is expanding through organic growth, new product development, and acquisitions. These three avenues of growth have resulted in an increase in HRL’s earnings for 28 of the last 32 years.

Source: Taste of Hormel Foods Q1 2018

Products are marketed internationally through Hormel Foods International Corporation, a wholly owned subsidiary. This entity has a presence in the international marketplace through joint ventures and in the placement of personnel in strategic foreign locations such as Australia, Brazil, Canada, China, Japan, and the Philippines. It also holds a 40% interest position in a food company in the Philippines (The Purefoods - Hormel Company, Inc.).

Impact of the Tax Cuts and Jobs Act (TCJ) on HRL

In Q1 2018, HRL recorded a one-time non-cash tax benefit of $68 million related to revaluing deferred tax liabilities and a $5 million charge related to mandatory repatriation tax. The reduction in HRL’s statutory tax rate, one-time tax events, and the adoption of new stock compensation related accounting standards reduced HRL’s Q1 effective tax rate to 0.6% (no, that is not a typo) versus 33.7% in 2017.

Source: HRL – 2018 Consumer Analyst Group of New York (CGNY) February 22, 2018 Presentation

The effective tax rate for FY2018 is expected to be 17.5% - 20.5% as opposed to the original 32.3% - 33.3% guidance. This lower statutory tax rate will provide ~ $0.11B - ~$0.14B in additional cash flow in FY2018.

HRL has indicated it expects its effective tax rate to be between 21.5% - 24.5% for FY2019 and beyond as a result of the passing of the TCJ in December 2017.

Q1 2018 Financial Results and Revised Diluted EPS Outlook

Details of HRL’s Q1 2018 results, including results for each of HRL’s 4 business segments, can be found in HRL’s February 22, 2018 Earnings Release.

Source: HRL – 2018 Consumer Analyst Group of New York (CAGNY) February 22, 2018 Presentation

HRL continues to experience challenges in the Jennie-O Turkey Store segment. It reported reduced profitability as a result of lower profits from whole bird and commodity sales and increased freight expenses. Lower selling, general, and administrative expenses partially offset a portion of the earnings decline.

Feed costs were flat relative to 2017 and in line with expectations.

Commodity turkey breast markets remain at multi-year lows, and inventories continue to be elevated. Commodity markets for whole birds were significantly below last year and below HRL’s expectations.

HRL’s Net Annual Sales guidance remains at $9.7B - $10.10B but its diluted EPS guidance has been revised to $1.81 - $1.95 from $1.62 - $1.72 with the recent TCJ having a major positive impact on this upward revision; diluted EPS in FY2017 amounted to $1.57.

At the February 22, 2018 CAGNY conference, HRL’s senior management reiterated the Key Priorities it laid out at its June 2017 Investor Day.

Source: HRL Q1 2018 Earnings Release February 22, 2018

Credit Ratings

Moody’s revised upward HRL’s senior unsecured debt A1 in January 2015 from A2; this rating is currently in effect. Standard & Poor’s has assigned an A rating; this rating was assigned May 2001 and remains in effect. Moody’s rating is the top tier of the Upper Medium Grade range while S&P’s rating is at the mid-point of this range.

Source: HRL – 2018 Consumer Analyst Group of New York (CAGNY) February 22, 2018 Presentation

Free Cash Flow (FCF)

Cash flow from operations in Q1 increased 56% to $0.304B.

Valuation

HRL has revised its diluted EPS (non GAAP) for FY2018 to $1.81 - $1.95/share from $1.62 - $1.72/share. With HRL having closed at $33 on February 22, 2018, HRL is currently valued at ~16.9 - ~18.2 of projected diluted EPS. I view this as a fair valuation level.

Dividend, Dividend Yield, and Dividend Payout Ratio

HRL’s dividend and stock split histories can be found here.

HRL’s current $0.1875/quarter dividend, $0.75/annually, provides investors with a ~2.27% dividend yield based on the February 22, 2018 $33 closing stock price.

The $0.75 annual dividend represents a forward dividend payout of ~38.5 - ~41.4 when evaluated relative to its FY2018 diluted EPS guidance of $1.81 - $1.95. This should give investors some comfort that HRL has the wherewithal to continue to maintain its Dividend King status (companies with 50+ years of continuous dividend increases).

Share Repurchases

While the weighted average number of diluted shares outstanding has ticked up slightly relative to that reported at FYE2017, I pay closer attention to the year over year change.

In the February 22, 2018 Earnings Release, management reiterated its ‘ unwavering commitment to returning cash back to our shareholders in the form of consistent dividend increases and share buybacks will not change.’

Final Thoughts

HRL shares are currently held in the FFJ Portfolio. Our level of HRL exposure is at a reasonable level relative to our entire portfolio (holdings in and out of the FFJ Portfolio). While I view HRL as fairly valued, I do not intend to acquire additional shares at this juncture as I am seeking more attractive investment opportunities.

I hope you enjoyed this post and I wish you much success on your journey to financial freedom.

Thanks for reading!

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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.