Hormel Has Meat on Its Bones

Unlike a lot of other meat-centric companies, Hormel (NYSE:HRL) stands apart as having a pretty good record of returns on capital and a sound history of cash flow utilization. Now, whether that makes it a good buy today remains to be seen.

Results for the company's fiscal fourth quarter were all right. Sales were up 10% as reported, although they were down 2% without acquisitions. Of course, there was an extra week in the year-ago period, so straight comparisons are not entirely fair. Nevertheless, margins improved at both the gross and operating level, and earnings per share were up 18% from the year-ago level.

There was pretty good performance across the board, with the specialty and turkey businesses vying for "best" in this quarter. Though the top line in turkey was sluggish, operating profits were up 31%, while the specialty business saw strength on both the top and bottom line. And that's not to say that the refrigerated and grocery businesses did poorly -- they didn't. Profits were flat for refrigerated foods and up slightly in grocery.

Hormel once again did well from a cash flow perspective. Operating cash flow increased 41% for the year, free cash flow increased about 44%, and structural free cash flow was up a bit more than 5%.

Part of what I like about Hormel is how it uses that cash flow. This is a company that generally prefers to invest in brands as opposed to building more processing capacity. Brands can produce excess economic value (Coca-Cola (NYSE:KO), anyone?), whereas capacity is a more commodity-like asset. The upshot is that Hormel has a better-than-average track record with returns on invested capital and is in a position to continue with better dividends and/or share buybacks.

A combination of good operating margins, good returns on capital, and management discipline with respect to cash flow puts this company ahead of the likes of Tyson (NYSE:TSN), Smithfield (NYSE:SFD), Pilgrim's Pride (NYSE:PPC), and ConAgra (NYSE:CAG) in my book. Guidance was a little soft for next year, and the stock isn't too cheap relative to my notion of fair value. But if I were to go with a domestic protein play, Hormel would be at or near the top of my list.

For more meaty missives from The Motley Fool:

• Tyson Foods' Fowl Fortunes
• Too Few Piggies Going to Market
• ConAgra's Bittersweet Quarter

Coca-Cola is a Motley Fool Inside Value pick. For a 30-day free trial, click here.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).