Analyst Note| Rebecca Scheuneman, CFA |
Hormel’s 7.6% organic sales growth in its April-ended second quarter handily beat our estimate for a 3.2% drop. We expected a sales decline as the company lapped last year’s pantry-stocking surge, but higher selling prices and strength in the food-service channel led to the upside. We think Hormel’s own dedicated salesforce provides a competitive edge in the away-from-home channel (one factor underpinning its narrow moat rating), as its competitors rely on brokers. This gives Hormel unique insights into restaurants’ unmet needs, leading Hormel to develop many labor-saving products, which have been in high demand, leading to material market share gains. Hormel’s food-service sales have already exceeded prepandemic levels, although education and lodging verticals remain depressed. Price increases (up 10.6%) was another material contributor to sales growth, as Hormel’s food-service and fresh pork pricing structures allow for cost pass-through, and cost for pork bellies and trim soared 57% and 76%, respectively, during the quarter. Hormel increased fiscal 2021 sales guidance by $500 million to $10.2 billion-$10.8 billion excluding the pending acquisition of Planters, above our $9.9 billion estimate. We plan to increase our sales forecast, which will be partially offset by our expectations that the U.S. corporate tax rate will increase to 26% from 21% beginning in 2022, resulting in a net mid-single-digit increase in our $35.50 fair value estimate. Shares rose 7% on the report and continue to trade well over our valuation.