Hormel Foods Corporation

HRL Details

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

Result Performance (Q2FY21 Ended April 25, 2021):

Net Sales Up 8% YoY: The company reported net sales of $2.6 billion in the second quarter period, an increase of 8% YoY  on the back of positive revenue growth across segments whereby there was 16.5% YoY rise in revenue from Refrigerated Foods, 2.4% YoY rise in revenue from Jennie-O-Turkey Store and 16.8% YoY rise in revenue from international and other.  

Pretax earnings stood at $293 million, an increase of 2% on pcp. This can be attributed to the company’s balanced business model which led it to achieve strong foodservice sales while observing continued elevated demand in the retail, deli and international channels, and improved supply chain performance.

Key Data (Source: Company Reports)

Outlook:

Elevated Demand: The investments made by the company over the years to build a world-class foodservice business, including an experienced direct sales force and portfolio of products that solve for customer challenges, give the company a competitive advantage as the industry recovery accelerates. In addition to foodservice growth, the company is witnessing  elevated demand in retail and deli channels compared to pre-pandemic levels, especially  for brands such as SPAM®, Jennie-O®, Hormel® Gatherings®, Hormel® Black Label®, Applegate®, Columbus®, Herdez® and Wholly.

Revised FY21 Guidance: The company has increased its full year FY21 sales guidance which is now expected  in the range of $10.20 to $10.80 billion and has reaffirmed its earnings per share guidance range of $1.70 to $1.82 per share, both of which exclude the expected impact of the Planters® snack nuts business.

Key Risks:

The company is witnessing pressure in the foodservice business  along with incremental supply chain costs which are weighing on the performance. Meanwhile, the company is anticipating a recovery in the foodservice business driven by the momentum in shipments during recent weeks.

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

Technical Overview:

Chart:

Source: REFINITIV

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

Stock Recommendation

The company’s EBITDA margin and net margin for Q2FY21 stood at 12.8% and 8.7%, better than the industry median of 12.6% and 5.5%, respectively, implying improved operating efficiencies. Its ROE for Q2FY21 stood at 3.4%, better than the industry median of 2.7%, implying that the company generated better returns for its shareholders than its peer-group.

We have applied EV/Sales based relative valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms). We have applied a slight discount to EV/Sales Multiple (NTM) (Peer Average) considering the fall in the operating margin as well as risks associated.

Considering the aforesaid facts,  we give a “Buy” recommendation on the stock at the current market price of $45.56 per share, down by 1.6% on August 4, 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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