Sometimes you can be so successful at one thing that nobody notices when you successfully branch out into new markets. Such might be the case with food processor Hormel Foods (NYSE:HRL). Still thought of mostly as a pork processor, Hormel has expanded into a range of meats and other food products.
This diversification appears to be working. Revenue grew 12% in the quarter ended in January, and earnings grew 24%. Operating margins were stronger, and the company's major business lines seem to be in order, particularly the refrigerated foods and Jennie-O turkey businesses.
Continuing growth in segments such as SPAM, bacon, and deli meats suggests that consumer demand for meat is still pretty good. Many have feared that the inevitable decline of the Atkins diet and other carb-phobic plans would eventually harm meat producers. This fear overlooks a basic point -- Americans are a meat-loving people. Even when the food cops were trying to scare people away from eating meat, we still ate meat. Accordingly, the decline of protein diets might take away a little growth, but isn't likely to really harm the meat industry.
That said, Hormel is clearly focused on growing its business beyond commodity meats and expanding its branded product business. In particular, Hormel seems to be targeting the growing Latino market in America with acquisitions such as Arriba Foods. As the fastest-growing minority group in the country, Latino consumers could be a boon to future results if Hormel can establish a foothold in the marketplace.
Of course, Hormel will also have to contend with pressures from competitors such as TysonFoods (NYSE:TSN), Kraft (NYSE:KFT), Smithfield (NYSE:SFD), and Sara Lee (NYSE:SLE) and pressures from shelf owners such as Wal-Mart (NYSE:WMT). The peer competition is pretty basic -- new products, better pricing, etc. Many investors, though, sometimes overlook the pressure that companies like Wal-Mart can produce. Not only does Wal-Mart attempt to squeeze out the best pricing terms possible, but also shelf space is a scarce commodity, and products that don't sell quickly lose that precious shelf space.
Trading at about 18 times trailing free cash flow and earnings, Hormel looks neither cheap nor expensive. With good (and improving) margins, a fair dividend, a growing base of business, and good management performance, Hormel is certainly among the best food companies around. Although the stock doesn't look like a screaming bargain today, long-term investors should probably sit tight.
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Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.
