How Hormel Foods Can Satisfy Your Hunger for Growth

Hormel Foods' impressive growth is proving that Spam is more exciting than you might think, and a recent acquisition might pave the way for future growth.

Jul 11, 2014 at 10:02AM

Hormel Foods Corporation (NYSE:HRL) is making some exciting moves that should have investors optimistic about its future. While it may sound ridiculous to get excited about a company that makes canned and packaged goods like Spam, Hormel has proven over the course of its long history that a boring business model can be extremely rewarding.

But Hormel isn't content to sit on its laurels and collect steady, albeit unimpressive, growth from its decades-old brands. It's pursuing growth through acquisition. Hormel recently announced an interesting takeover that will provide it with diversification into an up-and-coming product category that could reenergize its growth. Other companies have done this in the recent past, like Campbell Soup Company (NYSE:CPB), and the benefits are plain to see.

With its ambitious expansion strategy, Hormel is proving that it's much more than a stodgy food company.

Hormel

Source: Hormel website

An unlikely pairing on the surface
Hormel announced a few days ago that it will acquire nutritional supplements maker CytoSport for $450 million. CytoSport's products include Muscle Milk and whey protein powder, and are popular with younger consumers and others who are increasingly using protein supplements as meal replacements.

Not only that, consumers have widely embraced protein-based shakes and food products because of a broader interest in healthy lifestyles. As a result, CytoSport's products, including Muscle Milk, are now tapping into the health and fitness craze. That means that protein supplements are appealing to a much wider audience than just body builders. For example, The Wall Street Journal reports that CytoSport's products are popular on college campuses, where busy students opt for protein shakes like Muscle Milk as on-the-go meals.

Hormel expects CytoSport sales to hit $370 million this year, and the acquisition should add about $0.05 per share to its fiscal 2015 earnings. As a result, it seems Hormel snatched up CytoSport at a fairly attractive valuation of just 1.2 times sales. That's below Hormel's price-to-sales multiple, which stands at 1.4 times.

It might seem curious for the maker of Spam and other shelf-stable packaged foods to go after the maker of Muscle Milk. While that certainly sounds like an unappetizing combination, it's clear that Hormel intends to pursue new product categories that are exhibiting stronger growth than its core brands. For many years, Hormel has generated consistent growth and rewarded its shareholders in kind.

To that end, Hormel maintains a fantastic track record of shareholder returns. It's paid a regular quarterly dividend without interruption since it became a public company in 1928. That represents a streak of more than 340 quarterly payments and counting. In addition, Hormel has increased its dividend for 48 years in a row. And it's worth noting that it didn't just make token bumps to keep the streak intact. The last dividend raise was a solid 17% increase.

Hormel's highly successful business makes this possible. Last quarter, Hormel produced record earnings per share, which grew 13% year over year on the strength of a 4% increase in sales.

Hormel was founded in 1891, and since then has sold its flagship Spam and Hormel Chili to consumers. However, the company has broadened its product portfolio over the years. The company holds the Jennie-O brand and last year acquired the Skippy peanut butter line from Unilever (NYSE:UL), which generates about $700 million in sales.

Other food companies have pursued similar strategies of broadening their portfolios outside of their core competencies. For instance, Campbell is about much more than its namesake soups. It holds several other brands, including V8, Goldfish, and Pepperidge Farm, that provide it with valuable diversification.

Sales of Campbell's condensed soups fell 3% last quarter in the United States, but the strength of its other brands allowed it to post a 1% companywide increase in organic sales anyway.

The Foolish conclusion
Hormel will acquire CytoSport, the maker of Muscle Milk and other protein-based nutritional supplements. The move seems like an unlikely pairing, but in reality seems like a shrewd move by management to expand into a growing niche. Consumers far outside of body building are using nutritional supplements such as protein shakes. These include younger consumers who use these products as meal replacements.

Hormel got CytoSport at an attractive valuation and the deal should be immediately accretive to its earnings. Because of all this, it's clear that a business built on Spam will be more exciting than you might think.

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Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Unilever. 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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