Hormel Foods Corporation

HRL Details

Hormel Foods Corporation (NYSE: HRL) is a top branded food company globally with prominent brands comprising Skippy, SPAM, Hormel Natural Choice, Columbus, Applegate, Justin's, Wholly, Hormel Black Label, among others. It has four segments viz; Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other. Its brands are available in over 80 countries worldwide.

Achieved Highest Quarterly Sales in Q3FY21

• The company posted record net sales of $2.9 billion in Q3FY21, up by 20%, driven by growth across segments and sales channels. Overall volumes during the period increased by 1% to 1.2 billion lbs.
• The operating margin was reduced to 7.2% in Q3FY21 from 10.5% in fiscal 2020 due to one-off transaction and integration expenses of the Planters acquisition.
• The diluted earnings per share reduced to $0.32, down by 14% YoY, while adjusted diluted earnings per share rose to $0.39, up 5% YoY.
• The cash on hand reduced to $0.3 billion in Q3FY21 from $1.7 billion at the start of the year, while the total debt increased to $3.3 billion in Q3FY21 from $1.3 billion at the start of the year.

Exhibit 1: Performance Trend

Source: Analysis by Kalkine Group

Update on Planters Integration

In June 2021, the company completed the Planters snack nuts business acquisition and successfully integrated numerous functions after closing this acquisition. It financed the acquisition of the Planters snack nuts business through cash on hand of $1.1 billion and long-term debt of $2.3 billion.

Applegate Farms LLC Added Line to its APPLEGATE NATURALS Breaded Chicken

HRL's subsidiary, Applegate Farms LLC, on 9 November 2021, introduced two new additions to its APPLEGATE NATURALS Breaded Chicken line that includes APPLEGATE NATURALS Spicy Breaded Chicken Breast Bites and APPLEGATE NATURALS Spicy Breaded Chicken Tenders. These products are prepared with Applegate humanely-raised meat and 100% natural, non-GMO ingredients and are available at select retailers, including Whole Foods and Amazon. Moreover, Applegate Farms, LLC, on 3 November 2021, has launched the DO GOOD DOG hot dog, the first nationally available hot dog made with beef raised on verified regenerative U.S. grasslands.

Launched Limited-Edition, Bacon-Scented and Printed Wrapping Paper

The Makers of HORMEL BLACK LABEL Bacon, on 9 November 2021, has introduced HORMEL BLACK LABEL Bacon Wrapping Paper, a limited-edition, Bacon-scented and printed wrapping paper for the holiday season.

Increase in Annual Dividend

HRL announced the 6% rise to the annual dividend to shareholders. Notably, this marks the 56^th consecutive annual dividend increase.

Outlook

The company remains optimistic about the future owing to its balanced and diversified portfolio, several targeted investments, and the benefit of the acquisition of the Planters brand. As a result, it has guided of delivering record sales in Q4FY21. HRL also remains hopeful of achieving improving margins in Q4FY21 driven by the benefit of further pricing actions. For FY21, the company has guided its earnings per share to stay in the range of $1.65-$1.69 and its net sales are expected to remain between $11.0-$11.2 billion including the impact of the acquisition of the Planters snack nuts business. Additionally, it has set a target of incurring capital expenditures of $260 million in FY21. As per the company, large projects such as pepperoni capacity expansion in Nebraska and several other projects are expected to drive the growth of branded products.

Meanwhile, the company will release its earnings press release for its Q4FY21 and FY21 financial results on December 9, 2021.

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 the risk of reduction in consumer spending rates and shifts in consumer product preferences.

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

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

The stock has been valued using EV/Sales multiple based relative valuation (on an illustrative basis) and the target price so arrived reflects a potential rise of low double-digit (in % terms). A slight discount has been applied to EV/Sales Multiple (NTM) (Peer Average) considering higher debt/equity ratio in Q3 FY 2021 on the YoY basis. However, the company is having higher current ratio in Q3 FY 2021 as compared to the industry median.

Considering the aforementioned factors and decent outlook, we give a “Buy” recommendation on the stock at the current market price of US$43.02 per share, up by 0.91% on 22^nd November 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