Hormel’s Q3 Results Were in Line With Our Expectations, but Shares Weak on Rich Valuation

After narrow-moat Hormel’s fiscal third-quarter report, we don’t expect a material change to our $37.50 fair value estimate. We suggest investors remain on the sideline as the stock trades at a 25% premium to our valuation despite a 7% drop in the shares on the report. Hormel’s 3% organic sales growth was driven by a 14% increase in prices, partially offset by an 11% drop in volumes (exacerbated by a short supply of turkey given avian flu, temporary closure of its plants in China due to COVID-19, and the exit of commodity pork businesses). Elasticities remain favorable compared with historical norms per management, but we suspect that persistent inflation could cause consumers to switch to private-label fare, which is readily available in many of Hormel’s categories. Skippy benefited from a wide recall of Jif products (owned by no-moat Smucker), and Hormel also saw robust demand for labor-saving products in the food-service channel, given widespread worker shortages.