Image source: Hormel Foods.
What: Shares of Hormel Foods Corp (HRL -0.90%) fell 10.8% in May, according to data provided by S&P Global Market Intelligence, after reporting mixed earnings in the fiscal second quarter.
So what: Sales rose 1%, to $2.3 billion, but volume was down 1%, and was only made up for by rising prices. Net income was up 19.5%, to $215.4 million, or $0.40 per share. Earnings per share topped analysts' $0.38 estimate, but revenue fell short of the $2.33 billion expected
What caught the market's attention was sequentially falling margins highlighted by a drop in refrigerated food profit margin, from 14.4% to 11.9%. Rising costs could be a problem throughout 2016, and that's what had investors concerned in May.
Now what: The food business can see margins rise and fall depending on commodity prices, and Hormel's role as a processor usually takes the brunt of those changes. But the company still holds a strong market position, and will be around for decades to come. Shares aren't cheap at 24 times trailing earnings; but given the staying power of Hormel, I wouldn't be afraid of the short-term challenges the company may face with higher costs this year.
