Food purveyor Hormel Foods (NYSE:HRL) -- owner of the SPAM canned meat bonanza -- had good news this morning, or so you would think. Sales were up 15%, unit volume was up 6%, and earnings, excluding a positive impact from the sale of a packaging business, were up 28%.
So, the Wall Street reaction is -- drumroll, please -- making the stock the third largest percentage loser (down 8%). Why is Wall Street killing the beloved owner of SPAM? Or, is the correct question: Is there a killing to be made in SPAM?
What spooked the market was the company's earnings guidance. Analysts were projecting earnings of $0.53 next quarter and $1.62 for the fiscal year -- a big increase from $1.33 last year. That was in line with the company's estimate as late as May.
The company now projects $0.40 to $0.46 a share next quarter and $1.46 to $1.52 for the year. Rising grain prices, which hurt operating margins particularly in the turkey operation, are causing the company to temper its near-term outlook.
It is unclear when the company will be able to pass these costs on to consumers or see a fall in grain prices. But, for heaven's sake, Hormel and Stagg chili is now available in the Tetra Recart carton. What more could Wall Street want?
Higher grain prices should pressure poultry operating margins at Tyson Foods (NYSE:TSN) and Pilgrim's Pride (NYSE:PPC) -- and egg king Cal-Maine Foods (NASDAQ:CALM). But commodity prices have been buffeting results at ConAgra (NYSE:CAG), Kraft (NYSE:KFT), and Motley Fool Income Investor recommendation Sara Lee (NYSE:SLE) too.
Hormel, at 17 times earnings, is value priced. With a light debt load and a stable of strong brands, the stock is one that should afford investors a sound night's sleep.
Fool contributor W.D. Crotty does not own stock in the companies mentioned. He is also not guilty of trying to turn a SPAM pun into a few software company links.
