Hormel Foods Is Expensive but Enticing

With strong growth projections and an impressive dividend, Hormel looks like a good investment.

Mar 3, 2014 at 1:45PM

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.

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Prabhat Sandheliya 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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