Hormel Earnings: New Challenges Emerge, but Shares Already Price in Recovery

Hormel’s HRL 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.

With the disappointing third-quarter results, management reduced full-year guidance for sales to decline 4% to flat, down from previously 1% to 3% growth. Full-year diluted net EPS is guided to $1.51 to $1.57, down from $1.70 to $1.82. Our forecast of $1.77 per share is likely to decline about $0.20, but limited long-term impact minimizes the effect on our fair value estimate.

Weakness in the retail and international segments weighed in the quarter. In retail, lower commodity meat pricing helped drive sales down 2%, while unfavorable mix and increased brand investments drove segment profit down 7%. In international, volume fell 10% and segment profit fell 50%, mostly a result of the same meat price trends and continued softness in China. Management had expected results in China to reach an inflection point but instead, they’ve continued to decline amid a challenging macroeconomic environment.