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Instant Analysis: Hormel Foods Posts Strong Q1 Profit Growth, Raises Guidance

By Eric Volkman – Feb 22, 2016 at 11:54AM

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The company's bottom line improved by 37% on a year-over-year basis for the quarter.

What happened?
Recent months have been kind to Hormel Foods (HRL 0.83%), as the company revealed in fiscal Q1 2016 results released Feb. 16. For the quarter, Hormel's net sales were 4% lower on a year-over-year basis, at almost $2.3 billion. On the other hand, adjusted net profit saw a 37% leap to $235 million ($0.43 per diluted share). On an adjusted basis, the latter EPS was $0.35. The sales and profitability metrics came in a bit below the average analyst estimates, which were for $2.4 billion on the top line and adjusted EPS of $0.37.

The company pointed out that four out of its five operating divisions posted improvements in profitability. It singled out product lines like its Fire Braised meats and Muscle Milk protein drinks as strong performers during the quarter. "While sales were muted this quarter by turkey supply constraints and lower pricing due to declining pork markets, we enjoyed strong performance from many great products across our portfolio ..." CEO Jeffrey M. Ettinger was quoted as saying in a company press release.

Buoyed by its results, Hormel raised its forward guidance. For the entirety of fiscal 2016, it now anticipates a per-share profit of $1.50 to $1.56, up substantially from its previous estimate of $1.43 to $1.48. The range is also well above the $1.27 the company posted in its fiscal 2015.

Does it matter?
Fortunately for Hormel and its shareholders, the slight earnings miss will have less of an impact than the dramatically improved 2016 bottom-line projection.

Either way, investors should be cheered that the company is squeezing more profit from its operations, particularly considering the general consumer trend toward healthier eating. On the surface of it, this does not favor Hormel, which still specializes in canned and packaged products, like Spam, among its roughly 30 brands. But last year's acquisition of natural and organic meats purveyor Applegate Farms quickly inserted Hormel into the more wholesome end of the market.

Although the company is doing well, investors should be aware that it's expensive on a valuation basis. It currently trades at over 30 times trailing-12-month earnings, which is pricey for the food sector.

Eric Volkman has no position in any stocks mentioned, and neither does The Motley Fool. 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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