Investing legend Warren Buffett said, "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies." Food and meat companies Hormel (NYSE: HRL ) , Pilgrim's Pride (NASDAQ: PPC ) , and Tyson Foods (NYSE: TSN ) all represent businesses that sell needed items that will be less prone to obsolescence, unlike what you see in, say, the technology sector. However, you still need to do your research and look under the proverbial hood to see what exactly each one of them sells and whether or not they rest on solid financial footing.
Peanut butter and ham
Hormel's product portfolio includes the peanut butter brand Skippy, Hormel chili, and lunch meat products such as Spam. In the most recent quarter Hormel grew its revenue, net income, and free cash flow 6%, 18%, and 129%, respectively. Increased distribution of Hormel's Skippy product, new product innovation, superior pork margins, and international expansion helped with its top- and bottom-line expansion. Customer payments, lower inventory levels, and a higher accounts-payable balance contributed to the increase in free cash flow.
Hormel sits on a pretty decent balance sheet, with cash and long-term debt-to-equity ratios of 19% and 7%, respectively. Lower long-term debt means less interest to choke out profitability and cash flow. In 2013 Hormel paid out a frugal 32% of its free cash flow in dividends. Currently, Hormel pays its shareholders $0.80 per share per year and yields 1.7%.
Pilgrim's Pride sells mostly chicken in one form or another, according to its form 10-K: specifically, prepared chicken, fresh chicken, and "export and other chicken by-products" within the U.S. and in Mexico. In 2013 Pilgrim's Pride grew revenue, net income, and free cash flow 4%, 215%, and 472%, respectively. Lots of interesting factors went into these results. Increases in price made up for a drop in volume. Lower labor, improved worker's compensation rates, decreased production costs (most notably for corn), and derivative gains in its U.S. operations contributed to the huge net income expansion. Customer payments, lower inventory, and an increased accounts-payable balance all contributed to the increases in free cash flow.
Another plus comes from its balance sheet. Pilgrim's Pride's cash clocked in at 41% of stockholder's equity. The company reduced its long-term debt 56% in 2013, lowering its long-term debt-to-equity ratio from 126% to 34%. This also resulted in a 17% reduction in interest expense contributing to net income gains. Currently, Pilgrim's Pride pays no dividend.
Chicken, beef, and pork
Tyson Foods sells beef and pork in addition to chicken. This company also experienced explosive growth in profitability and cash flow. In its most recent quarter Tyson Foods' revenue, net income, and free cash flow grew 5%, 47%, and 570%, respectively. Tyson Foods' revenue increased across the board, stemming from volume and price increases with the exception of chicken and pork. Chicken revenue increased 2.1% stemming from a 4% volume increase slightly offset by a 1% price decrease. Moreover, record profitability in its chicken segment contributed significantly to the increase in overall profitability. Lower chicken feed costs didn't hurt, either. Pork experienced a sharp increase in price of almost 7%, probably resulting in the volume decrease of 2% in that segment.
Lower capital expenditures contributed to Tyson's Foods' vast increase in free cash flow in the last quarter. Last year Tyson Foods paid out a low 14% of its free cash flow in dividends. Currently, the company pays its shareholders $0.30 per share per year and yields 0.70% annually.
Things to look for
When investing in the meat industry it's important to keep in mind that the success of the participants stems from input costs as well as the price of its final product. Significantly lower prices of corn as well as the supply and demand of meat in general can all play a role. On a specific note, expect peanut butter expansion and product innovation to fuel growth for Hormel. This company sports the greatest potential due to its product diversity. For Pilgrim's Pride, look for management discipline via its "Revolution of Rising Expectations" to drive top- and bottom-line growth. Increased production, lower cost in grain supplies, and improved operational efficiencies should drive top- and bottom-line growth for Tyson Foods, even though a recent chicken nugget recall may put a temporary crimp in its operations .
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