Hormel Foods Corporation

HRL Details

Hormel Foods Corporation (NYSE: HRL) is a branded food company present globally with prominent brands comprising Skippy, SPAM, Hormel Natural Choice, Columbus, Applegate, Justin's, Wholly, Hormel Black Label, among others.

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

• The net sales increased 20% YoY to $2.9 billion in Q3FY21, led by an increase across segments and sales channels. Overall volumes in Q3FY21 grew by 1% to 1.2 billion lbs.
• Due to the impact of one-off expenses of the Planters acquisition and higher raw material feed costs, the operating margin was suppressed to 7.2% in Q3FY21 from 10.5% in Q3FY20.
• The company realized 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% due to an inventory rise.

Source: Company Reports, Analysis by Kalkine Group

Declared Dividend

• On 24 November 2021, the company distributed annual profit sharing to entitled hourly and salaried team members during the 83^rd consecutive grant.
• On 22 November 2021, the company stated a 6% rise to the annual dividend to shareholders, reflecting the 56^th consecutive annual dividend increase.

Outlook

The company anticipates record sales in Q4FY21. It also remains optimistic of achieving improving margins in Q4FY21 driven by the benefit of further pricing actions. Further, the company remains confident about the future, owing to its balanced and diversified portfolio, several targeted investments, and the benefit of acquisition of the Planters brand.

The company has guided its FY21 earnings per share to stay between $1.65-$1.69 and net sales between $11.0-$11.2 billion, including the impact of the acquisition of the Planters snack nuts business.

Key Risks

The company is exposed to the risk of changes in national or global economic conditions that could adversely hurt its business. Further, the company is susceptible to reducing consumer spending 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

The company has delivered a 6-month and one-year return of ~-11.37% and ~-9.88%, respectively. The stock is trading lower than the average of the 52-week high price of $50.86 and the 52-week low price of $40.48.

The stock has been 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 in the business in FY21.

Considering the above factors, a “Buy” recommendation has been assigned on the stock at the closing market price of $42.79 per share, up by 0.85% as of 8^th December 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