This Food Producer Looks Set for Growth

Aggressive marketing and weakening rivals can help Hormel’s growth going forward.

Jan 22, 2014 at 3:29PM

Turkey is the fourth most popular protein choice for American consumers after chicken, beef, and pork. However, on Thanksgiving Day, chicken, beef, and pork step aside making room for turkeys. In the U.S., 51 million turkeys were consumed last year on Thanksgiving according to Statistic Brain. In addition, 22 million turkeys are consumed on Christmas, and 19 million on Easter.

The USDA is projecting turkey meat production in 2014 to reach 6 billion pounds . This means that it is time to take a look at how Hormel Foods (NYSE: HRL), the second-largest turkey producer in the U.S., has performed. Hormel competes directly with the largest turkey producer, Seaboard (NYSEMKT: SEB), and chicken, beef, pork and prepared foods company Tyson Foods (NYSE: TSN). Will it be able to outperform them?

Strong performance
Hormel is known for its pork and turkey products, and has popular brands like Jennie-O turkey, Hormel, and the Spam family of products. It has also beefed up its portfolio by acquiring the iconic brand Skippy early last year . A robust performance from Skippy peanut butter and Hormel products in the international market resulted in stellar fourth-quarter results recently.

Hormel reported earnings of $0.58 per share, registering a jump of 18.4% over the year-ago quarter on estimate-beating fourth-quarter revenue of $2.3 billion. The company generated segment profits and revenue growth in four out of five of its segments.

Aggressive moves
Hormel is focused on allocating advertising resources to brand building in 2014, although there are no specific figures available as yet. The company will launch its first national advertising campaign to support the Skippy brand in the latter half of the year. This is going to be a growth driver going forward as Americans individually consume three pounds of peanut butter each year, and the current peanut butter market leader is J.M. Smucker's Jif.

While Hormel and J.M. Smucker battle it out for supremacy in the peanut butter market space, Hormel also has plans for allocating advertising dollars on its Jennie-O Turkey Store "Make The Switch" campaign . With grain and turkey commodity costs expected to be more favorable heading into 2014, the initiative will lead to top and bottom line growth.

With the emphasis on the "Make The Switch" campaign, Hormel is aiming at Seaboard's Butterball LLC in its battle for supremacy in the turkey products market space that Butterball currently dominates. Seaboard is a global conglomerate with interests in food, energy, and transportation. Seaboard also has its hand in the pork processing verticals through its subsidiary Seaboard Foods, which is one of the largest vertically integrated pork producers and processors in the United States. Pork remains a big business in the U.S., and around 70% of Hormel's revenue revolves around the pork business with another 20% coming from turkey .

Tyson's loss Hormel's gain?
Tyson Foods is another force to reckon with in the "Protein Power" market space. During the fourth quarter, it reported revenue growth in the chicken, beef, pork, and prepared foods segment, leading to a consolidated sales increase of 7% to $8.9 billion . Driven by revenue growth, it reported adjusted earnings of $0.70 per share and this was better than what analysts had expected.

Tyson, traditionally a meat processing company, has been more involved in the prepared food business as it offers value addition and the possibility of higher margins. Because of intense competition at grocery stores, it will be challenging for Tyson Foods, which is relatively new to the packaged food business, to compete for customer dollars with established suppliers like Hormel.

For fiscal 2014, Tyson projects sales to be around $36 billion on the back of strategies to fuel growth in domestic value-added chicken sales, prepared food sales, and international chicken production. Tyson might find the going difficult, however, as it recently ran into controversy and had to recall 34,000 pounds of its chicken products. This happened after reports emerged that it might be contaminated with salmonella.

These chicken products are mainly sold for institutional purposes, but Tyson's image might take a hit and hurt its financial performance.

Bottom line
Hormel is aggressively planning to build its brand going forward, and this is why it will be spending on marketing this year. The company has also rolled out a campaign to win over customers from peers such as Seaboard. Meanwhile, trouble at Tyson could help Hormel gain more share in the pork segment. All in all, Hormel seems to be in a good position going forward and investors should definitely take a look at it.

Meetu Anand has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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