Hormel: Recent Headwinds Shouldn’t Threaten Dividend Aristocrat Status, but Shares Fairly Valued

We are raising our fair value estimate for Hormel Foods HRL 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.

Still, shares trade slightly above our fair value estimate at $41 per share, as solid second-quarter results comforted investors that near-term headwinds are fading. Management’s efforts to reduce bloated inventory, right-size manufacturing to demand, and stabilize Planters had immediate effect, putting full-year guidance for sales growth of 1% to 3% and diluted net EPS to decline 7% to flat within range. Furthermore, we forecast Hormel’s streak as a “dividend aristocrat,” which it has held for its 57 years of consecutive annual increases, will continue.

We reaffirm our narrow economic moat rating for Hormel based on intangible assets stemming from its strong brands and entrenched relationships with retailers and food-service companies. Leading brands include Spam (claiming the top spot with 50%-plus market share in the $2.4 billion shelf stable meat market versus just 9% share for private label), Applegate Farms and Jennie-O (number three and number four brands, respectively, with a combined 5% share in the $8 billion chilled processed poultry market dwarfed by the 11% share for private label), Skippy (number two with 18% market share in the $2.8 billion nut- and seed-based spreads market consistent with the 18% share held by private label), and Planters (which boasts leading branded share at 17% in the $8.1 billion nuts, seeds, and trail mixes market, though this is eclipsed by the 33% share private label has amassed).