EUR 850.00 For Business Accounts Only

Morningstar | Despite intense competition, Hormel's efforts to focus on differentiated items should drive results.

Hormel has developed a portfolio of value-added protein brands, reducing its reliance on commodity products and building a narrow moat. Its health-friendly labels, such as Jennie-O Turkey and Applegate, are on trend and should allow the firm to expand distribution in previously untapped channels. Hormel’s Spam and Skippy brands have international appeal, offering the company a means of securing a foothold for those and other products abroad, a potential growth opportunity. However, the sustainability of Hormel’s brand intangible asset is threatened by reliance on the center of the grocery store, which has seen rising competition even as consumers increasingly look for fresh products.Hormel has a history of strong return generation and a conservative balance sheet, which we expect to continue. Our forecast implies an average adjusted return on invested capital of 19% over the next 10 years, near the firm’s 20% five-year historical mean.Management targets 5% revenue and 10% earnings growth annually, but we believe Hormel will need to rely on acquisitions and share buybacks to achieve its objectives, as we forecast more modest respective paces of 4% and 6% over the next 10 years (organically). Although Hormel has benefited from the availability of synergistic assets that suffered from inattention from their former owners (Skippy) or came available due to special circumstances (Applegate), valuations for on-trend, growing firms remain elevated. These levels may anchor takeout price expectations, particularly for private entities.Hormel’s performance is still influenced by feed and hog market conditions, as well as animal disease concerns, despite efforts to diversify away from pork. Diverse product streams and brand strength limit the firm’s exposure to such considerations relative to other meat processors, but as the 2015 avian influenza outbreak and subsequent price deflation affecting its turkey operations attest, Hormel is not immune. As such, we think the firm will need acquisitions to reach management’s EBIT margin goal (top quartile of peer group--roughly 15%--by 2020, though we see this bar falling somewhat as commodity costs normalize).