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 Period Ended 25 July 2021 (Q3FY21)

• The net sales grew 20% YoY to $2.9 billion in Q3FY21, driven by growth across segments and sales channels. Overall volumes during the period increased 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 reduced to 7.2% in Q3FY21 from 10.5% in Q3FY20.
• The company witnessed a 14% YoY decline in diluted earnings per share to $0.32 in Q3FY21, while adjusted diluted earnings per share rose to $0.39 in Q3FY21, up 5% YoY.
• The company reported cash flow from operations of $77 million in Q3FY21, down 77% owing to a rise in inventory.

Consolidated Financial Snapshot (Source: Company Reports) 

Key Updates

• On 6 October 2021, the company announced that its venturing company, 199 Ventures, has signed a partnership with The Better Meat Co. to bring new mycoprotein and plant-based protein products.
• On 27 September 2021, the company declared a quarterly dividend of 24.50 cents on the common stock, payable on 15 November 2021 with a record date of 18 October 2021.

Outlook

The company has guided of delivering record sales in Q4FY21. It also remains hopeful of achieving improving margins in Q4FY21 driven by the benefit of further pricing actions. Further, the company remains optimistic 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 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 six and nine months, the stock price was down by ~11.46% and ~6.35%, respectively. In addition, the stock is trading lower than the average price of the 52-week low-high range for the stock at $40.48-$52.51, respectively.

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 on the business in FY21.

Considering the above factors, a “Buy” recommendation has been assigned on the stock at the closing market price of $41.88 per share, up by 0.55% as of 20^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

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