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Hormel Foods Corp HRL

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Narrow-Moat Hormel Handily Beats Our Second-Quarter Sales Forecast, but Shares Look Fully Cooked

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.

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Company Profile

Business Description

Hormel Foods is a protein-focused branded food company. Its brands include its namesake Hormel, Spam, Jennie-O, Dinty Moore, Applegate, Wholly Guacamole, and Skippy. The vast majority of the company’s revenue is U.S.-based: 67% U.S. retail, 26% U.S. food service, and 7% international. By product type, in fiscal 2020 22% of revenue was shelf-stable foods, 20% was poultry (branded and commodity), 55% was other perishable food, and 3% was other, primarily nutritional products. The company holds the number-one market position in shelf-stable meat, shelf-stable ready meals, pepperoni, natural/organic deli meat, guacamole, and the number-two position in turkey, bacon, chilled ready meals, and peanut butter.

1 Hormel Place
Austin, MN, 55912-3680
T +1 507 437-5611
Sector Consumer Defensive
Industry Packaged Foods
Most Recent Earnings Apr 30, 2021
Fiscal Year End Oct 25, 2021
Stock Type Slow Growth
Employees 19,800


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