Hormel Foods Corporation

HRL Details

Hormel Foods Corporation (NYSE: HRL) is primarily engaged in producing meat and food products and the marketing of those products throughout the USA and internationally.

Result Performance for the Third Quarter Ended 25 July 2021 (Q3FY21)

• Net sales increased by 20% YoY to $2.9 billion in Q3FY21 (organic net sales up 14% YoY), primarily driven by strong growth across segments and sales channels. Overall volumes in Q3FY21 increased by 1% YoY to 1.2 billion lbs.
• The company witnessed a 14% YoY decline in diluted earnings per share to $0.32 in Q3FY21, while adjusted diluted earnings per share increased to $0.39 in Q3FY21, up 5% YoY.
• The cash flow from operations stood at $77 million in Q3FY21, down 77% YoY due to a rise in inventory due to phenomenal raw material costs.

Consolidated Financial Snapshot (Source: Company Reports) 

Key Updates

• As per the release dated 6 October 2021, the company’s venturing company, 199 Ventures, has signed a partnership with The Better Meat Co. to acquire new mycoprotein and plant-based protein items in the marketplace.

Outlook

The company anticipates a record sale and an improvement in margins in Q4FY21, primarily led by favourable pricing actions. Further, the company remains positive on the future business prospects owing to its balanced and diversified portfolio, several targeted investments, and the benefit of acquisition of the Planters brand. On the guidance front, earnings per share will stay in the range of $1.65-$1.69, and net sales will be in the ambit of $11.0- $11.2 billion, considering the acquisition of the Planters snack nuts business.

Key Risks

The company will be exposed to the risk of changes in national or global economic conditions that could adversely hurt its business. Further, the company is susceptible to the risk of reduction in consumer spending rates and shifts in consumer product preferences.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation

Over the last three and six months, the stock price was down by ~11.37% and ~11.35%, respectively. In addition, the stock is trading below the average cost of the 52-week low-high range at $40.48 - $52.51, respectively.

The stock is valued using EV/Sales multiple based relative valuation (on an illustrative basis). The target price so arrived reflects the potential rise of low double-digit (in % terms). In addition, a slight discount has been applied to EV/Sales Multiple (NTM) (Peer Average), considering the decline in operating margin in Q3FY21 and the expected inflationary cost pressures on the business in FY21.

Considering the aforementioned factors, a “Buy” recommendation has been assigned on the stock at the closing market price of $41.69 per share, up by 0.85% as of 8^th October 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices