Morningstar | Hormel’s 2018 Results Leave Firm on Track to Meet Long-Term Targets; Shares Unattractive
Our $36 fair value estimate for narrow-moat Hormel should not see a large change after fourth-quarter earnings. While commodity market conditions weigh near-term, we think Hormel's efforts to diversify away from undifferentiated products should alleviate some of the volatility long-term. Our long-term forecast (mid-single-digit sales growth, low-teens average operating margins through fiscal 2027) is intact, but we believe sentiment underestimates the degree of competitive pressure throughout the industry.Full-year results ($9.55 billion sales, $1.86 diluted GAAP EPS) were near our marks ($9.6 billion and $1.82, respectively). Management set fiscal 2019 guidance at $9.7 billion to $10.2 billion of sales and diluted EPS of $1.77-$1.91, consistent with our targets ($10.0 billion sales and $1.84 EPS).
Hormel finished combining its deli brands into a single unit within its refrigerated foods segment (50% of sales). We believe the combination (targeting around $1 billion in sales, or around 10%) will deepen Hormel’s customer relationships as it offers broader solutions to retail clients. More broadly in refrigerated foods, we are encouraged by the firm’s increased exposure to branded value-added products that helped limit segment profit erosion to around 40 basis points for the year (to 12.9%) even as commodity profits slid 31% amid rising freight costs.
The grocery segment (26% of sales) saw somewhat sluggish full-year sales (down 1%) amid slow results at CytoSport (including its Muscle Milk lineup) and in contract manufacturing. Hormel took a $17 million impairment charge for CystoSport in the quarter, suggesting a rare misstep for a management team with a strong record of prudent acquisition activity (underpinning our exemplary stewardship rating, which we do not plan to change). However, we believe the portfolio's meaningful, on-trend brands (such as its peanut butter offerings) should lead to low-single-digit long-term sales growth despite competition.
Hormel Foods is primarily engaged in the production of meat and food products and the marketing of those products throughout the United States and internationally. The company's segments are: Grocery Products, which consists of the processing, marketing, and sale of shelf-stable food products; Refrigerated Foods, which consists of the processing, marketing, and sale of branded and unbranded pork, beef, chicken, and turkey products; Jennie-O Turkey Store, which consists of the processing, marketing, and sale of branded and unbranded turkey products; and International and Other, which includes Hormel Foods International Corporation that manufactures, markets, and sells the company's products internationally.
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