Hormel: Shares Plunge on Disappointing Long-Term Profit Outlook Presented at Investor Day

Narrow-moat Hormel’s HRL 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.

In addition to the operating income growth targets, management announced an annual organic growth rate target of 2%-3%, which matched our expectations, and $225 million in operating income benefit by fiscal 2026 from cost improvement programs. At that level of top-line growth, roughly half or more of Hormel’s operating income growth could come organically. But the cost cuts could also deliver the operating income growth target by itself, so the company’s target seems to imply that business margins are unlikely to recover to historical levels as we had expected, a change that drives our likely fair value estimate cut.

Despite our disappointment with the three-year outlook, our views on the company’s narrow moat rating and its ability to maintain its decadeslong streak of annual dividend increases remain intact. We believe the company will continue to generate excess economic profit stemming from its strong brands and entrenched retailer relationships. Additionally, we forecast the dividend can increase by about 5% per year, with leftover cash deployable to share repurchases or debt reduction.