These Two Companies Should Offer More Potential than Hillshire Brands

Hillshire Brands (NYSE: HSH  ) has underperformed its peers Hormel Foods (NYSE: HRL  ) and Tyson Foods (NYSE: TSN  ) over the past year in regard to stock appreciation. In that time frame, Hillshire Brands has appreciated 25.98%, whereas Hormel Foods and Tyson Foods have seen stock appreciation of 45.46% and 77.95%, respectively. This underperformance seems to be justifiable, and it might continue.

Identity and strategy
Hillshire Brands manufactures and markets high-quality brand name food products, with the majority of its sales in the United States to retailers and foodservice customers. You might recognize some of its brands, such as Jimmy Dean, Ball Park, Hillshire Farm, State Fair, Sara Lee frozen bakery, and Chef Pierre.

The company's strategy is to create long-term shareholder value by strengthening core businesses via brand building, innovation, expansion into new categories, and acquisitions. These initiatives have potential, but any acquisitions will be costly considering Hillshire Brands is already leveraged, sporting a debt-to-equity ratio of 1.94. Operating cash flow is $307 million. So, yes, acquisitions are affordable, but an acquisition is not likely to be a move of much significance unless Hillshire Brands becomes more leveraged. In the current economic environment, where debt is encouraged, it might not matter. However, if you're looking for a long-term investment, like Foolish investors are wise to do, then that debt might eventually catch up with the company.

Even if you're not a believer in this theory, Hillshire Brands didn't exactly impress in its recent first quarter. Net sales increased 1% to $984 million year over year, thanks to a favorable product mix and pricing initiatives. However, volume was down, which indicates declining demand. Operating income slid 35.2% to $55 million, mostly due to a $39 million increase in the cost of sales, which stemmed from higher commodity costs. Earnings per share came in at $0.23 versus $0.40 in the year-ago quarter. Fortunately, a better investment option (or two) might exist.

Breaking records
Tyson Foods delivered more inspiring numbers in its most recent quarter, that being the fourth. Tyson Foods broke its sales record, seeing a 7% improvement to $8.9 billion. EPS jumped 23% to $0.70, operating income climbed 18% to $416 million, the dividend increased 50%, and 9.9 million shares were repurchased for $300 million.

Tyson Foods continues to build out in China, which is likely to bode well for Tyson Foods given the rising middle class in China. Tyson Foods is also growing its prepared foods business through acquisitions. Based on the company's recent interest in Mexican cuisine, it's obvious that Tyson Foods is in-trend. Additionally, Tyson Foods sports a healthy debt-to-equity ratio of 0.39 and it has operating cash flow of $1.24 billion. In other words, it can more easily afford to grow inorganically than Hillshire Brands.

Peer comparisons
Below is a chart comparing Hillshire Brands, Tyson Foods, and Hormel Foods on the top line over the past year:

HSH Revenue (TTM) Chart

HSH Revenue (TTM) data by YCharts

As you can see, Hillshire Brands lags its peers.

The bottom-line comparisons over the past year might seem a little more difficult to decipher, but notice that Tyson Foods has seen recent upside momentum, and that Hormel Foods has methodically improved.

HSH EPS Diluted (TTM) Chart

HSH EPS Diluted (TTM) data by YCharts

Consider total shareholder return (stock appreciation plus dividend payments) over the past decade. While past results don't guarantee future success, they're usually a good indicator which relates to the strength of management and industry trends. 

HSH Total Return Price Chart

HSH Total Return Price data by YCharts

As you can see, Hillshire Brands has lagged its peers. Hormel Foods has been the top performer, and Hormel Foods is attractive for a variety of reasons. First consider its diversification. It operates in five segments: grocery products, refrigerated foods, Jennie-O turkey store, specialty foods, and international & other. It's consistent on the top and bottom lines, and now consider some key metric comparisons:

 

Forward P/E

Profit Margin

Dividend Yield

Debt-to-Equity Ratio

Hillshire Brands

17

5.80%

2.10%

1.94

Hormel Foods

19

5.83%

1.50%

0.08

Tyson Foods

11

2.06%

0.70%

0.38

Hormel Foods is the best of the three at turning revenue into profit, it has demonstrated masterful debt management, and it offers a decent yield. Let's not forget about its consistent top-line growth. Considering Tyson Foods' recent performance and optimism for the future, it sure does look appealing on a valuation basis. Hillshire Brands also offers a decent yield. 

The bottom line
Tyson Foods recently delivered record sales, and it stated that it's poised for strong growth in FY 2014. Hormel Foods is consistent in just about every area, which is a nice complement to its diversification. Hillshire Brands is a quality company, but its recent numbers didn't impress, and its leverage is somewhat of a concern. Put simply, Tyson Foods and Hormel Foods are likely to outperform Hillshire Brands going forward. However, please do your own research prior to making any investment decisions. 

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