Company Reports

Hormel Foods has long been on U.S. shelves, with strong meat-centric brands like Jennie-O, Spam, Dinty Moore, and various Hormel-branded goods. These brands tend to hold number one or two share in their categories. To keep pace with evolving trends, Hormel has expanded its focus through acquisitions of non-meat protein brands like Skippy and Planters and branded meat products like Applegate. It has also entered ethnic and emerging food with Wholly Guacamole, Herdez, and Happy Little Plants. Concurrently, Hormel has reduced its commoditized farming footprint, increasingly relying on third-party farmers. Taken together, we think these moves stabilize its competitive standing and improve profitability in the competitive packaged food arena.

Narrow-moat Hormel reported a decent start to fiscal 2024 with first-quarter volume growth of 4% year on year. This is particularly notable as most packaged food companies have struggled to recover volumes following inflation-driven price increases during the past year or so. Net sales were up about 1%, which again looks decent against the broader industry backdrop, while the adjusted operating margin held roughly steady at 9.8%. On our initial reaction to the first quarter, we don’t expect to make a material change to either our long-term forecasts (low-single-digit sales growth and 11% adjusted operating margin) or $31 per share fair value estimate. Shares trade slightly above our fair value estimate.

Narrow-moat Hormel provided an underwhelming margin outlook during its investor day last month that was further confirmed in its fiscal 2023 earnings release. Our changes led us to cut our fair value estimate to $31 per share, down from $37. Shares look fairly valued after considering our medium uncertainty rating for Hormel.

Hormel Foods has long been on U.S. shelves, with strong meat-centric brands like Jennie-O, Spam, Dinty Moore, and various Hormel-branded goods. These brands tend to hold number one or two share in their categories. To keep pace with evolving trends, Hormel has expanded its focus through acquisitions of non-meat protein brands like Skippy and Planters and branded meat products like Applegate. It has also entered ethnic and emerging food with Wholly Guacamole, Herdez, and Happy Little Plants. Concurrently, Hormel has reduced its commoditized farming footprint, increasingly relying on third-party farmers. Taken together, we think these moves stabilize its competitive standing and improve profitability in the competitive packaged food arena.

Narrow-moat Hormel’s investor day disappointed us by offering a three-year plan that highlighted a long-term operating income growth target of 5%-7% per year through fiscal 2026, much of which will come through cost-optimization efforts with a yet-to-be-announced price tag. In contrast, we had expected operating income to grow at a midteen rate over that period, largely representing a recovery of margins to prepandemic levels. Thus, we expect to lower our fair value estimate of $37 per share by a low-double-digit percentage, roughly in line with the stock’s 10% drop. Prior to today's event and market reaction, we had thought shares were roughly fairly valued, and expect that will remain the case after our valuation revision.

Hormel Foods has long been on U.S. shelves, with strong meat-centric brands like Jennie-O, Spam, Dinty Moore, and various Hormel-branded goods. These brands tend to hold number one or two share in their categories. To keep pace with evolving trends, Hormel has expanded its focus through acquisitions of non-meat protein brands like Skippy and Planters and branded meat products like Applegate. It has also entered ethnic and emerging food with Wholly Guacamole, Herdez, and Happy Little Plants. Concurrently, Hormel has reduced its commoditized farming footprint, increasingly relying on third-party farmers. Taken together, we think these moves stabilize its competitive standing and improve profitability in the competitive packaged food arena.

Hormel’s third quarter revealed new weaknesses that plagued performance, with sales surprisingly declining 2.3%. Previous full-year sales guidance implied a sales acceleration for the second half. On the positive side, the adjusted operating margin, which excludes a $70 million payment from arbitration, remained steady at about 9.7%, compared with 9.6% a year ago. We expect to reduce our fair value estimate of $38 per share by a dollar or so for narrow-moat Hormel on weaker near-term performance. We continue to forecast a return to low-single-digit annual sales growth and operating margins to return to 13% over the next five years. So, with shares trading near our fair value estimate, we think the market is already pricing in recovery and see limited risk-adjusted upside.

We are raising our fair value estimate for Hormel Foods to $38 from $37.50, which implies a 21 times 2023 EPS multiple and an enterprise value to 2023 adjusted EBITDA of 15 times. The increase comes from a slightly more optimistic long-term outlook, with 2027 adjusted EBITDA of nearly $2.3 billion now 7% higher than our prior forecast, as we now expect a quicker recovery from recent headwinds at both the top line and margin.

Hormel Foods has long been on U.S. shelves, with strong meat-centric brands like Jennie-O, Spam, Dinty Moore, and various Hormel-branded goods. These brands tend to hold number one or two share in their categories. To keep pace with evolving trends, Hormel has expanded its focus through acquisitions of non-meat protein brands like Skippy and Planters and branded meat products like Applegate. It has also entered ethnic and emerging food with Wholly Guacamole, Herdez, and Happy Little Plants. Concurrently, Hormel has reduced its commoditized farming footprint, increasingly relying on third-party farmers. Taken together, we think these moves stabilize its competitive standing and improve profitability in the competitive packaged food arena.

Following Hormel's weak first-quarter results, second-quarter earnings looked pretty good. Sequentially, sales were roughly flat, volume was up about 4% and gross margin remained steady at 16.5%, as management quickly addressed the issues that plagued the start of its fiscal 2023. This included reducing bloated inventory, rightsizing manufacturing to demand, and stabilizing Planters. We don't anticipate a change to our $37.50 fair value estimate for narrow-moat Hormel, but shares look fairly valued.

There wasn’t a ton to like in Hormel’s first-quarter print. Sales fell 2% on a nearly 12% drop in volumes, gross margin contracted 100 basis points to 16.7%, and operating margin shrank 80 basis points to 9.7%. A portion of the underperformance can be attributed to the usual suspects—supply chain disruptions, unrelenting cost pressures, and the lagging impact on turkey supply from the avian flu. However, we were more troubled by the business failing to pivot to market dynamics, resulting in production across its categories eclipsing demand; Planter’s (a brand that had been a bright spot in its mix) was qualitatively referenced as particularly weak.

We believe Hormel’s narrow moat is secured by a strong brand portfolio with demonstrated pricing power, entrenched retail relationships due to the firm’s number-one and -two positions in several categories, and a position as one of the leading providers of protein to the food-service industry, differentiating itself by servicing these clients with its own salesforce. The long-term transition from a commodity protein producer to a branded consumer product firm has served Hormel well, helping to stabilize prices and demand for its strong brands.

Narrow-moat Hormel Foods posted solid fourth-quarter results, with organic sales edging up 2.4%, aided by an 11.8% contribution from price/mix, partially offset by a 9.4% drawdown in organic volume. However, we attribute this volume decline to a short supply of turkeys given avian flu and efforts to shed commoditized offerings, which we see as prudent. In this context, management suggested that price increases are holding, but we think continued inflationary angst could prompt consumers to opt for lower-priced private-label fare before long. To combat these pressures, we expect Hormel will maintain its unwavering commitment to funnel resources into product innovation (research and development) and marketing that should help support its brand intangible asset. This commitment even aided its food-service operations (30% of sales) in the quarter, as management said it was able to buck concerns around labor shortages to post strong results (qualitatively referenced), which we think is a byproduct of investments to build out its solutions-based product portfolio (which requires less labor).

We believe Hormel’s narrow moat is secured by a strong portfolio of brands with demonstrated pricing power, entrenched retail relationships due to the firm’s number-one and -two positions in several categories, and a position as one of the leading providers of proteins to the food-service industry, differentiating itself by servicing these clients with its own salesforce. The long-term transition from a commodity protein producer to a branded consumer product company has served Hormel well, helping to stabilize prices and demand for its strong brands.

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.

Heading into Hormel’s April-ended second-quarter earnings report, shares were trading at a significant premium to our valuation, possibly because investors had underestimated risks stemming from events outside of the company’s control, such as herd/flock disease and unpredictable weather, which can result in volatile feed prices. These risks are now impacting Hormel’s fiscal 2022 results, leading to a 5% share price decline. However, we plan to maintain our $37.50 per share fair value estimate for Hormel, as our forecast had anticipated these factors, and we continue to suggest investors wait on the sidelines due to the valuation.

We believe Hormel’s narrow moat is secured by a strong portfolio of brands with demonstrated pricing power, entrenched retail relationships due to the firm’s number-one and -two positions in several categories, and a position as one of the leading providers of proteins to the food-service industry, differentiating itself by servicing these clients with its own salesforce. The long-term transition from a commodity protein producer to a branded consumer product company has served Hormel well, helping to stabilize prices and demand for its strong brands.

Despite the very challenging operating environment, we were confident that Hormel’s solid management team would navigate the choppy waters competently, and we were not disappointed. But Hormel’s consistent execution is already priced into the shares, which trade at a 35% premium to our valuation after the 4% pop on the report. As we don’t expect a material change to our $37 fair value estimate, we suggest investors remain on the sideline.

We believe Hormel’s narrow moat is secured by a strong portfolio of brands with demonstrated pricing power, entrenched retail relationships due to the firm’s number-one and -two positions in several categories, and a position as one of the leading providers of proteins to the food-service industry, differentiating itself by servicing these clients with its own salesforce. The long-term transition from a commodity protein producer to a branded consumer product company has served Hormel well, helping to stabilize prices and demand for its strong brands.

While growth abounded for domestic food manufacturers as consumers rushed to stock up on essential wares as COVID-19 took hold, it hasn’t been a pure panacea for this intensely competitive space. And we think the future trajectory hinges on which of the trends that took center stage the past few years will hold. In this context, while we concede many consumers honed their cooking skills while sheltering at home, as busy schedules resume, we think food consumption will revert such that a greater portion of budgets are expended outside of the home, in line with prepandemic levels. Further, although grocers simplified shelf assortments to maximize productivity during the peak in demand, we think variety will return as supply chains normalize.