Hormel (HRL) Fights Pricing Challenges With New Acquisitions

We issued an updated research report on premium meat products company, Hormel Foods Corporation (NYSE:HRL) on Nov 22.

Existing Scenario

Hormel Foods reported better-than-expected fourth-quarter fiscal 2017 (write when it ended) results. The company intends to boost its near-term profitability on the back of stronger demand, new investments and latest business acquisitions.

Increased sales of popular brands such as Hormel Gatherings, Hormel Pepperoni, Hormel Natural Choice, Justin's, Wholly Guacamole, Herdez, Spam and SKIPPY are expected to reinforce the company’s top-line performance in the near term.

Meanwhile, the $130-million capital investment planned to expand the vacant facilities in Kansas (anticipated to be accomplished by December 2018) is likely to help in boosting Hormel Foods’ near-term revenues by capturing the growing market demand for bacon.

Even so, Hormel Foods believes that the strategic acquisition of the Fontanini brand from Capitol Wholesale Meats, Inc (Aug 17, 2017) and the Ceratti brand from Cidade do Sol (Aug 24, 2017) might boost its revenues and earnings in the quarters ahead.

Also, it stated that Columbus Craft Meats buyout (announced in October 2017) will continue to boost its earnings from fiscal 2018 onwards. Notably, for fiscal 2019, whole-year accretion is projected to lie between 6 cents and 8 cents per share.

Additionally, the company believes that consolidation of its Specialty Foods segment into the Grocery Products segment (from fiscal 2018 onward) will assist in delivering increased revenues and cost synergies in the long haul.

However, we notice that Zacks Consensus Estimate for this Zacks Rank #3 (Hold) stock has moved south for fiscal 2018 (ending October 2018), over the last 60 days. Over the last three months, Hormel Foods shares have gained 1.8%, underperforming the industry’s growth of 12.7%.

In the fiscal fourth quarter, Hormel Foods’ Jennie-O Turkey Store segment’s revenues and profit dipped nearly 10.4% and 24%, respectively. The decline was owing to the fall in turkey prices that weighed over the segments’ performance. In fact, the turkey market has been facing an oversupply situation and is unlikely to witness price hike in the upcoming quarters.

Meanwhile, lower sales of MUSCLE MILK products led to a 9.2% decline in revenues in the Specialty Foods segment. Even so, spin-off of the Farmer John business was primarily responsible for 5.7% year-over-year downfall in the Refrigerated Foods segment. Hormel Foods perceives that lower turkey prices will continue to hurt its Jennie-O Turkey Store business in the quarters ahead.

Furthermore, Hormel Foods’ margins are frequently subjected to input price fluctuations. Supply-demand inconsistencies also make the market prices of these inputs highly volatile. For instance, the company’s margins were severely hurt due to significant inflation in the prices of two major inputs — pork bellies and beef trim — in the reported quarter. Going forward, the company expects that elevated costs of these two inputs would continue hurting its profitability.

Stocks to Consider

Some better-ranked stocks in the industry are The Boston Beer Company (SAM), Pilgrim's Pride Corporation (PPC) and Craft Brew Alliance, Inc. (BREW). While Boston Beer and Pilgrim's Pride sport a Zacks Rank #1 (Strong Buy), Craft Brew Alliance carry a Zacks Rank #2 (Buy).

Boston Beer delivered an average positive earnings surprise of 63.35% in the last four quarters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Pilgrim's Pride came up with an average positive earnings surprise of 1.53% in the last four quarters.

Craft Brew Alliance pulled off an average positive earnings surprise of 250.20% in the last four quarters.

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