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Can Spam Gains Keep Hormel’s Stock High Long-Term?

By Rhian Hunt – Jun 25, 2020 at 8:35AM

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Traditional canned meat is enjoying a renaissance with COVID-19 on the loose.

As the novel coronavirus stubbornly persists in the U.S. and globally, refusing to fade with hot summer weather arriving, companies like Hormel (HRL -1.26%) are benefiting from the growth in demand for canned meat and other shelf-stable comestibles.

Like many companies positioned to gain from the pandemic, Hormel's shares are currently trading near their highest prices ever. But the question remains: Can the food company lock in its gains even once COVID-19 fades or is brought under control by a vaccine?

Canned meat's new lease on life

After years of losing ground to more healthy and perhaps more glamorous dietary choices such as vegan menus or grass-fed meats, the one-time staple of canned meat made a powerful comeback this year. With people stockpiling food for coronavirus lockdowns and other pandemic emergencies, Bloomberg reports a more than 70% spike in American canned meat purchases during the 15 weeks leading up to June 13. Canned meat is also selling vigorously in Europe and Asia.

Canned meat.

Image source: Getty Images.

COVID-19 also highlighted the possible fragility of the U.S. meat industry and made canned meats more desirable. Since it is highly centralized at a few facilities, the whole country's meat supply chain threatened to fracture when outbreaks shuttered several meatpacking plants. Infections at a single Columbus Junction, Iowa, slaughterhouse owned by Tyson Foods closed down 2% of America's entire pork production. 

COVID's lingering influence

While the coronavirus has somewhat subsided from its March and April peak, it's far from gone. Nearly 30,000 new infections are still reported daily. As states across the American South and Southwest reopen for business, COVID-19 gains fresh momentum due to increased, unprotected human contact. Johns Hopkins University reports climbing positive test results in multiple states, with the fastest growth of confirmed illnesses in Texas up 10%, Florida up 11%, Utah up 11%, and Arizona up by 20%.

Looking at parallel events, the Spanish influenza of 1918, which caused approximately 50 million deaths around the globe, persisted for approximately 15 months and came in three waves, with the second wave being the deadliest. While COVID-19 belongs to a different family of viruses, it resembles the Spanish influenza in general terms as a respiratory pandemic disease spread easily from person to person. Some models predict as many as 290,000 deaths in the U.S., with at least one Harvard Global Health Institute doctor suggesting a minimum of 100,000 second wave deaths even sooner.

Research by Morning Consult indicates many Americans are cautious about coronavirus, with many changing their habits to avoid possible infection. As of June 15, surveys indicated only 41% "felt comfortable" using a restaurant's dine-in facilities. The percentages who felt comfortable with other activities were even lower: 35% for shopping malls, 23% for movies, 21% for concerts, and 13% for international travel.

Hormel, COVID, and the future

Hormel's second-quarter 2020 earnings report, released on May 21, provides a useful snapshot of COVID-19's effect on operations. Overall, the company reported a record-setting $2.4 billion in net sales, with organic net sales up by 6% and organic volume rising by 7%.

The company broke down sales by segment, which appears to show Hormel did indeed gain notably from the canned meat trend. Refrigerated foods, reliant on restaurant and other foodservice sales, saw volume, sales, and profit all decline. However, the Grocery segment witnessed "double-digit growth" in Spam, Hormel Chili, and Skippy peanut butter, leading to organic gains of 19% in volume, 20% in net sales, and 22% in segment profit.

While the International Sales segment saw organic volume slip by 1%, net sales rose 3% and segment profit skyrocketed by 62%. The company specifically notes "strong global demand for Spam luncheon meat and other branded exports overcame softer foodservice sales," demonstrating its ability to quickly trim its strategic sails to match the winds of current food sector trends.

Looking at Hormel's flexible response to COVID-19, which allowed it to chow down on the abrupt shift to high demand for canned meat and shelf-stable food, it appears to have the adaptability needed to stay profitable in today's uncertain conditions. Considering the ongoing COVID-19 pandemic and the linked, greatly boosted consumer interest in stockpiling staples suggests that while purchases of storage-ready foods may moderate, they won't quickly fall to pre-coronavirus levels.

Hormel will likely continue trading near its current share value highs, with the potential for even more gains. Add in the fact that Hormel Foods is a "dividend king" with a decade's worth of delivering 11.1% average annual EPS (earnings per share) growth, and you have a stock Fools interested in consumer staples stocks may find well worth looking at.

Rhian Hunt has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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