Hormel Foods Buys Fontanini, Boosts Foodservice Portfolio

Premium meat products company, Hormel Foods Corporation (NYSE:HRL) recently enhanced its foodservice portfolio, on the acquisition of the Fontanini brand from Capitol Wholesale Meats, Inc. (Capitol Wholesale Meats), for $425 million. This move is anticipated to reinforce the company’s acquisition-based growth strategy and boost its near-term performance as well.

Chicago, IL-based Capitol Wholesale Meats is a premium producer of authentic Italian sausages and meats. It is also the manufacturer of other types of quality meat products, including meatballs and pizza toppings. Fontanini is a popular Italian meat and sausage brand of the company. Notably, Capitol Wholesale Meats owns a new state-of-the-art production facility in McCook, IL.

Foodservice is a high-margin business of Hormel Foods. The company noted that its foodservice business is rapidly growing on the back of the expanding portfolio of customers in the restaurant, lodging, healthcare and academic sectors.

Hormel Foods also stated that the strategic buyout of the Fontanini brand will accelerate the current growth rate of its foodservice business. Moreover, the ownership of the Capitol Wholesale Meats’ high-tech facility in McCook will likely augment the company’s competency.

Post the buyout, Fontanini will continue operations in its existing facility located in the Chicago metropolitan area. However, it would report its operations under Hormel Foods’ Refrigerated Foods segment.

Why Should You Put the Stock on Hold?

Dismal turkey prices, extensive business rivalry and escalating operating expenses are expected to thwart the near-term margins of Hormel Foods’ Jennie-O Turkey Store segment. Also, outbreak of livestock diseases, input price inflation or a stronger U.S. dollar might adversely affect the company’s performance, moving ahead. Over the last month, shares of the company yielded a return of 3.80%, underperforming 9.49% growth recorded by the industry.

However, this Zacks Rank #3 (Hold) stock believes that the increased sales of major brands (like Hormel Gatherings, Hormel Pepperoni and Hormel Natural Choice), diligent innovation investments and greater operational efficacy will likely bolster the company’s near-term results.

In addition, Hormel Foods has been fortifying its product portfolio on the back of a number of acquisitions for the past few years. For instance, the buyouts of premium brands like Skippy (in January 2013), Muscle Milk (August 2014) and Junstin’s (June 2016) have largely supported the company’s top- and bottom-line growth, so far. We believe that the above-mentioned acquisition of Fontanini brand will also bolster Hormel Foods’ inorganic growth path over the long term.

Key Picks

A few better-ranked stocks in the industry are listed below:

Nu Skin Enterprises, Inc. (NYSE:NUS) has an average positive earnings surprise of 10.83% for the last four quarters and currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The New York Times Company (NYSE:NYT) holds a Zacks Rank #2 and has an average positive earnings surprise of 43.06% for the trailing four quarters.

Inter Parfums, Inc. (NASDAQ:IPAR) also holds a Zacks Rank #2 and has an average positive earnings surprise of 18.08% for the past four quarters.

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