Hormel Foods Is Expensive but Enticing

Meat producer Hormel Foods (NYSE: HRL  ) recently released its first-quarter results, which turned out to be impressive. Earnings per share increased 19%, while four of Hormel's five segments performed well in the period. Management is optimistic regarding the prospects of the business and expects this momentum to continue into the future.

So, we will examine Hormel's performance and management's expectations while also comparing the company with peers Tyson Foods (NYSE: TSN  ) and Pilgrim's Pride (NASDAQ: PPC  ) .

A look at the quarter
Hormel's revenue rose 6%. Sales of grocery products increased 20%, driven by Skippy peanut butter, Hormel chili, Hormel bacon toppings, and the HERDEZ line of salsas and sauces. 

Despite good sales, Hormel also faced many challenges. Its profit margin was narrow due to high beef and pork input costs. Also, sales of its SPAM brand was soft during the previous quarter. But Hormel saw strength in sales from the refrigerated segment. A variety of products such as Hormel BLACK LABEL bacon, LLOYD'S Ribs, and Hormel REV Snack Wraps drove performance in this segment.  

Sales also grew in the food-service business as a result of solid product sales in Hormel Fire Braised meats and Old Smokehouse Pecanwood Smoked Bacon. On the other hand, the food-service business declined 1% due to increased utilization of raw materials internally. 

Looking ahead
Hormel is undertaking aggressive marketing strategies to improve profitability in the second quarter. It is organizing national media campaigns and other promotional activities to support its SPAM line of products and Compleats microwave meals. Hormel's Jennie-o-Turkey is expected to perform even better in the next quarter. 

Moreover, strong sales of the Skippy peanut butter brand and refrigerated products like pork and beef are some more tailwinds on which Hormel is counting. The company's Hormel REV Snack Wraps are also seeing growth. The company's enticing growth projections make the stock worth watching in this industry. 

Solid valuation and growth projections
When compared to peers Tyson Foods and Pilgrim's Pride, Hormel is expensive, as we can see in the table below:

Company

Trailing P/E

Forward P/E

Expected five-year growth CAGR

Profit margin

Hormel Foods

23.03

18.64

11%

6.19%

Tyson Foods

16.61

12.82

7%

2.47%

Pilgrim's Pride

8.19

12.31

9%

6.53%

Source: Yahoo! Finance

So, Hormel is the most expensive pick in its peer group. But there are some solid reasons behind this premium. As clearly seen above, Hormel's expected growth rate over the next five years is the highest of the lot at 11%. Peers Tyson and Pilgrim's Pride are lagging with 7% and 9% projected growth rates, respectively. Also, Hormel enjoys a superior profit margin as compared to peers, which makes it a good pick in an environment where input costs are rising.

For example, input costs at Pilgrim's Pride are expected to rise due to an increase in propane prices and fuel costs, and these might affect profitability. Also, Pilgrim's forward P/E is expected to increase, which means that analysts are looking at a drop in earnings in the next couple of years.

Finally, Tyson has the lowest profit margin of the lot, and its profit growth expectation is also the lowest. Moreover, Tyson's dividend yield of 0.8% is less than half of Hormel's impressive 1.7% yield. So, despite being expensive, Hormel looks like a better buy.

Takeaway
Hormel Foods, with its marketing strategies and a diversified business that includes grocery foods, refrigerated foods, and food service, looks like a good investment. The company isn't cheap, but in relative terms, it is a better investment than peers on account of its growth projections and profit margin.

Put your money where your mouth is
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2862073, ~/Articles/ArticleHandler.aspx, 12/21/2014 7:15:06 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement