Is Hormel Foods a Good Buy Near Its 52-Week High?

Hormel is trading close to its 52-week high, but will it be able to break this barrier?

Jun 16, 2014 at 1:45PM

Despite reporting record second-quarter results in May, Hormel Foods (NYSE:HRL) failed to impress. The meat producer's earnings fell short of consensus estimates, while weak guidance for the current fiscal year didn't help matters either.

Moreover, competitors like Tyson Foods (NYSE:TSN) and Pilgrim's Pride (NASDAQ:PPC) are aggressively looking to acquire more companies to expand, while Hormel's troubles might increase going forward. In such circumstances, is Hormel a good buy at its 52-week high?

A mixed performance
In the second quarter, Hormel's revenue increased 14% year over year to $2.45 billion, which surpassed analysts' estimates of $2.24 billion. But, in spite of a considerable increase in revenue, its volume decreased 1% from the year-ago period on account of price increases for beef, pork, and other commodities. Also, Hormel's earnings were up 12% from last year to $140 million.

 However, Hormel's earnings didn't grow at the pace the Street expected as a result of an increase in beef prices and a shortage in hog supplies. A deadly virus killed millions of American pigs and Hormel's performance was hurt as a result. 

A few positives
The hike in input costs led Hormel to increase the prices of some of its products such as Hormel chili and Dinty Moore stew. In addition, it also increased the prices of its Wholly Guacamole products. Consequently, these items saw sales decline. But, Skippy peanut butter, Hormel bacon toppings, and the Herdez line of products performed well.

The company launched its new Skippy Singles peanut butter last quarter and the product drove sales. In addition, Hormel also saw strength in its food-service business, which includes Hormel Fire Braised Meats, Old Smokehouse Pecanwood Smoked Bacon, and Natural Choice deli meats.

Sales from Hormel's turkey business, Jennie-O Turkey, also improved marginally. The harsh winter weather along with a rise in natural gas prices hurt sales in this segment. But, its Jennie-O Turkey team adopted various initiatives to weather the difficulties.  

Its decision to invest in the Make The Switch media campaign drove heightened consumer interest in Jennie-O Fresh ground turkey tray packs and ground turkey chubs. On the back of these strategic moves, Hormel managed to post a slight improvement in operating profit. 

Also, Hormel's international business turned in a solid performance, driven by the inclusion of its Skippy operations in China. In addition, Skippy peanut butter and fresh pork saw strong export numbers from China. 

However, going forward, the company expects its margins to remain under pressure due to elevated costs of beef, pork, turkey, and avocado. In order to reduce the pressure on margins, Hormel has increased the prices of some of its products, but this would negatively impact volumes. The addition of the Skippy peanut butter business will help the company offset some of these overall input cost pressures, but heightened competition in the industry can eliminate this advantage.

Competitive climate
Tyson Foods, for example, recently won the auction to acquire Hillshire Brands, the producer of Jimmy Dean sausages and other meat products, for $7.7 billion. According to Tyson management, the Hillshire acquisition will enable it to cut around $300 million in costs annually. Tyson has paid a 70% premium for Hillshire to expand its sales channels, and this move will undoubtedly strengthen its business. 

Tyson already has a strong foothold in the chicken market, having contracts with more than 4,300 poultry farmers. It is focusing on cost-cutting moves such as using LED lights to grow chickens in place of traditional lighting. So, the Hillshire acquisition, when complete, will allow it to cut costs further.

Tyson beat Pilgrim's Pride in the auction to acquire Hillshire. However, Pilgrim's Pride management will continue scouting for other meat and chicken processors to expand its reach in areas where it has a limited presence. As reported by The Wall Street Journal, analysts expect Pilgrim's to buy Sanderson Farms, while Perdue Farms and Fieldale Farms are other potential acquisition targets.

Pilgrim's already has a strong position in both the food-service and retail channels, supplying products to the likes of ConAgra, Sysco, Burger King, Yum! Brands, etc. Hence, an acquisition would enable it to further enhance its position in the industry.

The takeaway
Hormel is enduring a tough time. Although the company reported good growth in its financial performance last quarter, it might not be able to sustain this going forward. An increase in prices has already dented volumes, and competitors' moves can complicate things further. So, investors should consider staying away from Hormel, as it looks like a risky bet near 52-week highs.

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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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