EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat Hormel's Exposure to On-Trend Categories Positions the Firm for Accelerated Growth

We believe Hormel’s narrow moat is secured by a strong portfolio of brands with demonstrated pricing power, entrenched retail relationships due to the firm’s number-one and -two positions in several categories, and a position as one of the leading providers of proteins to the food-service industry, differentiating itself by servicing these clients with its own salesforce. While competitive pressures are unlikely to abate, we believe the firm is working to stabilize its competitive position through organic and inorganic efforts. Hormel has shifted its mix to include more on-trend fare sold as fresh products on the periphery of the store (Jennie-O turkey, Applegate natural and organic meats and cheeses, and Wholly Guacamole, to name a few) where consumers are spending more of their time. Now only 19% of the company’s revenue is from shelf-stable foods, a category that has been under pressure. Furthermore, we anticipate that the company will increase brand investment, which should help maintain market share despite continued headwinds.To fuel additional brand spending, with the objective of revitalizing organic sales growth, Hormel is extracting excess costs from its supply chain, which we view as prudent. Because of these efforts, we think the firm is poised for gross margin improvement from the midteens historically to the high 20s over the next decade. We expect it will direct these funds back into research and development and marketing to elevate its spending closer to peers (mid-single-digit percentage of sales). We don’t think the firm’s channels for expansion are limited to its home turf. We believe Hormel has a significant opportunity to expand its businesses internationally, as only 7% of revenue is from outside the United States currently. Spam and Skippy both have international appeal and are being launched globally. Also, Hormel’s recent acquisition of Ceratti, a Brazil-based producer of deli products, gives the company access to the fast-growing Brazil market. We think Hormel can use this business as a foundation to launch its legacy brands across Latin America.