Hormel (HRL) Down 0.9% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Hormel Foods (HRL). Shares have lost about 0.9% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Hormel due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Hormel Foods Q1 Earnings Lag Estimates, Sales Up Y/Y

Hormel Foods Corporation (NYSE:HRL) has posted first-quarter fiscal 2020 results, wherein both top and bottom lines increased year over year. Its sales surpassed the Zacks Consensus Estimate, while earnings missed the same.

Quarter in Detail

Quarterly earnings of 45 cents per share lagged the Zacks Consensus Estimate of 46 cents. Nevertheless, the bottom line increased 2% year over year. This can be attributed to higher sales and reduced effective tax rate.

Net sales were $2,384.4 million, which surpassed the Zacks Consensus Estimate of $2,361 million. Moreover, the top line increased 1% year over year, owing to rise in sales at International, Jennie-O Turkey Store and Refrigerated Foods units. Notably, organic sales grew 4% year over year.

Hormel Foods' volumes witnessed a 1% drop, while rose 2% on an organic basis. Selling, general and administrative expenses increased nearly 1% to $195.5 million. Operating margin contracted 120 bps to 11.8%.

Segment Details

Sales in the Grocery Products unit decreased 10.9% to $540.6 million and volumes declined 14% due to the divestiture of CytoSport. Further, organic sales declined as gains from SPAM and Wholly could not completely offset weakness at Skippy. Also, segmental profit declined 28.2% to $68.4 million.

Revenues in the Jennie-O Turkey Store segment rose 2.8% to $330.1 million, with volumes rising 8%. Sales were driven by improvements at commodity and whole-bird businesses along with better pricing. Segmental profit grew 1.7% to $3.6 million, owing to increased commodity profits and operational gains.

The company’s Refrigerated Foods segment generated sales of $1,351.8 million, up 5.7% year over year. Also, volumes rose 3%. The upside was fueled by-products like Hormel Bacon 1 and Hormel Fire Braised as well as retail sales of Hormel Black Label and Hormel Cure 81. Also, improved deli sales of Hormel Gatherings party trays along with Applegate branded products contributed to the upside. Moreover, segmental profit increased 2.9% to $167.3 million due to increased commodity profits.

International & Other revenues increased 5.4% to $161.9 million. Additionally, volumes increased 5%. Results were driven by improved fresh pork export volume and robust demand in China. However, segmental profit plunged 20.1% to $20 million on elevated input costs in China, Brazil and other countries in Asia.

Balance Sheet & Cash Flow

The company ended the quarter with cash and cash equivalents of $724.4 million, and long-term debt of $309 million (excluding current maturities).

In first-quarter fiscal 2020, Hormel Foods generated cash of $188.4 million from operating activities. Capital expenditure summed $58 million in the quarter. Management expects capital expenditure of $360 million for fiscal 2020.

Key Development

The company announced an agreement to acquire a Texas-based pit-smoked meats company, Sadler's Smokehouse. The buyout is in synch with Hormel Foods’ initiative of strengthening position in foodservice. Also, the company plans to expand the Sadler's product line into its retail and deli channels. The deal, which is worth $270 million, is likely to be closed in March 2020. The acquisition is anticipated to be neutral to slightly negative to fiscal 2020 earnings as a result of the investments into the business and production facility. Yearly sales, excluding transfers to Hormel Foods, are likely to be somewhere near $140 million.

Outlook

The company is pleased with the strength in the Refrigerated Foods segment and at the Jennie-O Turkey Store. The company is particularly encouraged about the prospects of SPAM, Whollyand Herdez. Also, it is undertaking efforts to enhance prospects at SKIPPY spreads and Hormel brands. However, headwinds related to the African swine fever and the recent outbreak of coronavirus in China. Also, it expects elevated protein prices for fiscal 2020.

All Said, Hormel Foods reaffirmed its previous guidance. The company anticipates net sales of $9.5-$10.3 billion for fiscal 2020, whereas it reported $9.5 billion in fiscal 2019. Earnings are likely to be $1.69-1.83 per share, whereas it reported$1.80 in fiscal 2019.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

Currently, Hormel has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Hormel has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.