The protein industry is set to be disrupted in 2020 according to the 2019 Farm Animal Investment Risk & Return (FAIRR) Index, and if the sudden rise of "Beyond Meat" and other copycat start-ups is anything to go by, the disruption is already here. The FAIRR Index looks at food companies' resilience to challenges such as antibiotic use, food safety, sustainable proteins, and animal welfare. And Hormel Foods Corporation (NYSE:HRL)is one company that is already embracing alternative raw materials.
The risks facing food producers in 2020 and beyond
The main takeaway from the FAIRR Index is that the best food sector investments will be in companies that recognize the growing demand for sustainable practices. Such companies are expected to face less risk because they will mitigate their exposure to environmental and associated economic threats.
For example, whether or not you agree with climate change experts, new research shows that food companies' bottom lines are being affected by changing weather patterns. These patterns affect crop yields and market prices. Cal-Maine Foods reported a 30% decline in revenues in the last quarter of the year alone, which the company attributes to extreme weather.
According to Peter Van der Werf , engagement specialist and sustainability expert for Coller Capital, the goal for sustainability and continued profits is for producers and investors to avoid meat and fish as protein sources as much as possible.
Already, meat alternatives are one of the fastest growing plant-based segment categories with vibrant activity from both start-ups and established food companies. In 2018, plant-based meats sales grew by 20% compared to an increase of just 8% in 2017, according to Nielsen data.
The dramatic uptick in growth in the demand for alternative meats is evident, and Hormel is responding to that demand.
Hormel continues to produce niche products
The 2019 Coller FAIRR Protein Producer Index 2019 highlighted Hormel for best practices for water usage and the only company that has established a sustainable agricultural policy that extends to feed-grain growers. In early September, Hormel launched a plant-based alternative Happy Little Plants™ brand at Barclays Global Consumer Staples Conference.
Hormel has been ahead of the curve on the alternative protein front as The Happy Little Plants brand builds on blended protein innovations that started back in 2014. Almost six years ago, the food producer launched the Hormel Fuse burger in the company's foodservice business. After the success of the Fuse burger, Hormel expanded is plant-based offerings to include pizza toppings and the Applegate Blend Burger. Little Plants products will be distributed to select retail outlets with expansion planned shortly.
A look at the company's press releases shows a company with a strong pipeline of new and exciting products to keep the consumer interested. From squeeze-pouch peanut butter to pumpkin spice flavor SPAM (yes, you read that right), the ideas keep coming.
No debt, no problem
With a low debt load, Hormel's financials show sustainability and resilience, funnily enough. The company ended the quarter with cash and cash equivalents of $560.2 million and long-term debt of $250 million.
Despite suffering from the effects of African Swine Fever and high avocado prices, Hormel Foods was pleased with its third-quarter earnings performance. The company confirmed its outlook for fiscal 2019 with expected net sales of $9.5 to $10 billion. Further, earnings are anticipated to be $1.71 to 1.85 per share.
Quarterly earnings of 37 cents per share came ahead of the Zacks Consensus Estimate of 35 cents. However, the bottom line fell nearly 5% year over year due to the increased effective tax rate.
According to Zacks Rank, Hormel stock has gained nearly 12% in the past three months compared with overall industry growth of 31.3%
A confident Hormel also repurchased 2.7 million shares for nearly $107 million during the quarter, indicating that the food giant might consider its stock undervalued.
With a low debt load and with consumers keen to try its new products, Hormel has plenty of leeway to invest in its future. That future looks to be full of stock returns, alternative proteins, but I'm guessing perhaps less of the pumpkin spam.