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The Case for Owning Hormel Foods

By Pratik Thacker - Mar 26, 2014 at 11:05AM

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Do Hormel Foods' great quarter, bright outlook, and strategic efforts provide reasons enough to make an investment?

However, Hormel Foods ( HRL 1.59% ), a packaged-food and meat producer, managed to perform well despite all of the difficulties it faced over the last few months. Although the company's earnings came in slightly below the Street's estimates, its first-quarter numbers still gave investors confidence in the company.

A snapshot of what happened
Hormel's revenue stood at $2.24 billion, surging 6% over last year, as volume increased by 2%. The acquisition of the Skippy peanut butter business provided one of the primary reasons for this jump. The addition of Skippy drove sales for the grocery product segment and the international segment north. In fact, volumes grew 24% and 9% for the grocery and International segments, respectively.

Also, high demand for bacon products helped the company's top-line grow. Higher bacon sales and new snacks introduced recently drove the growth of the refrigerated food segment. Products such as Hormel Rev Wraps and Black label bacon items became quite popular with Hormel's customers.

Only the specialty food segment failed to show up, which hampered the top line. Sales from the segment dropped 16%, mainly because a food-service agreement on sugar substitutes expired. Nonetheless, the company has taken measures to rebuild its product portfolio, which should boost its sales.

Moving down to the bottom line, Hormel's earnings grew 19% to $0.57 per share despite problems that included higher costs to keep birds warm and rising fuel costs.

Some of Hormel's peers have done a remarkable job of keeping their costs under check. For example, Pilgrim's Pride Corporation ( PPC -1.32% ) posted great fourth-quarter results, which beat analysts' expectations. Although its revenue decreased 7% to $2.05 billion, its earnings grew 20% to $0.55 per share. Lower costs for chicken production provided the main driver for this increase in the bottom line. In fact, this factor also resulted in a gross margin expansion of 680 basis points, as this figure clocked in at 10.2% for the quarter. Hence, it is interesting to see how these meat companies manage their costs efficiently.

Roadblocks ahead
Hormel Foods must deal with a number of problems. In addition to the problem of cold weather and rising fuel costs, Porcine Epidemic Diarrhea virus, or PEDv, has been killing piglets in the U.S. This has resulted in a shortage of raw material supply which has affected input costs. Hence, this factor will impact future costs as well.

Similarly, Tyson Foods ( TSN -0.89% ) has witnessed huge problems because of bird-flu outbreaks which hampered overall demand for chicken in China. In fact, this factor added to Tyson's woes related to lower pig supply because of the reasons stated above. However, the food retailer still posted healthy numbers, which came mainly because of growth in its prepared food segments. In addition to acquiring Bosco's Pizza Co., the company introduced a number of breakfast items which helped its revenue grow 4.7% in its last-reported quarter.

Hormel Foods has also been focusing on the growing breakfast segment since its latest introductions, such as the Rev Snack wraps and Fire Braised meats, have done well. These products should continue to bring the company additional revenue.

In order to promote its offerings, the meat retailer plans a marketing push. Also, it plans to relaunch a consumer-oriented advertising campaign which will help it attract more customers.

Although Hormel expects that these measures will boost its future results, as a result of cost issues the company maintained its previous projection. Hormel reaffirmed its earnings guidance for fiscal 2014, which calls for earnings of $2.17-$2.27 per share.

Conclusive thoughts
Although Hormel Foods faces many obstacles, it seems to have overcome each of them easily. The food company posted an impressive quarter and reaffirmed its outlook for the year. Moreover, new breakfast products and marketing efforts should have benefits for the company. Therefore, investors should not ignore this meat retailer.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Pilgrim's Pride Corporation Stock Quote
Pilgrim's Pride Corporation
$27.71 (-1.32%) $0.37
Tyson Foods, Inc. Stock Quote
Tyson Foods, Inc.
$78.26 (-0.89%) $0.70
Hormel Foods Corporation Stock Quote
Hormel Foods Corporation
$42.06 (1.59%) $0.66

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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