Diversification or diworsification. Balancing the business or spreading yourself too thin. Exploring new avenues of growth or losing focus on the company's core skills. The term that Wall Street bestows upon new product expansion ideas generally depends entirely on whether or not they work.
Although meat specialist Hormel
Total sales were up 15% to $1.3 billion, though much of that growth was purchased, and the so-called "organic" rate of growth was about 4%. While gross margin was down a bit from last year, good expense control made up for it, and the operating margin actually improved by a very slight amount. Operating income grew more than 16% for the quarter, but higher tax expense sucked some of that away and reduced the net income growth to about 4%.
While operating profits in the grocery and refrigerated-foods segments fell 2% and 31% respectively (because of the aforementioned higher meat prices), the Jennie-O Turkey business saw sales rise 4% but operating profit more than double. It was pretty much a "perfect storm" for Hormel's turkey business -- a strong market for turkey meat and double-digit growth of new premium turkey products, coupled with lower feed costs and efficiencies in production.
Predicting the future price of agricultural products is often as rewarding as playing Three Card Monty, but Hormel executives think that prices will move in their favor through the balance of the year. Hog prices have been skidding for pretty much all of May, and a recent USDA inventory report suggests there's a lot of pork in the pipeline. What's more, management thinks grain prices will be fairly stable for the rest of the year and that the turkey business will continue to be quite strong.
Valuation on Hormel has been remarkably consistent over the past decade or so, with the P/E generally trending between about 15 and 18. So, with the current P/E at about 17.5, Hormel might be a bit on the pricey side. Still, worldwide demand for protein is only going to increase, and I, for one, do not expect Hormel to get left behind.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
