Morningstar | No Surprises in Narrow-Moat Hormel’s First-Quarter Report; Shares Modestly Overvalued
We do not anticipate a material change to our $36 valuation after Hormel reported first-quarter earnings largely in line with our expectations. Two salmonella-related recalls on Jennie-O lean ground turkey resulted in a 10% drop in volumes for that product, but we are encouraged that conditions in the overall turkey market are improving. After two years of oversupply driving low-single-digit price declines, segment prices and profits were flat in the quarter, despite the recalls. Furthermore, the new deli division appears to be off to a strong start, driving the refrigerated food segment’s 2% revenue growth, exceeding management’s expectation. All three segments of deli (grab & go, prepared foods, and behind the glass) grew in the quarter.Hormel announced it is selling the Cytosport business, housing the Muscle Milk brand, to wide-moat Pepsi for $465 million. We are pleased with the price of this $300 million revenue business as Hormel originally purchased it in 2014 for $450 million when revenue was $370 million. Although Hormel successfully expanded Muscle Milk’s distribution into food, drug, and mass, the business has struggled due to fierce competition. Pepsi has been the long-standing distribution partner for Muscle Milk, and we can appreciate the value Pepsi can bring to this business, given its scale and expertise in the beverage space. The transaction frees up capital for Hormel, and we would not be surprised to see it make additional investments in its foodservice or international businesses, strategic areas of focus for the firm.
We are disappointed that Hormel plans to hold advertising expense flat in the current year. Although the firm has successfully shifted its products from commoditized proteins to branded food (we estimate that only 10% to 15% of revenues are commodity), Hormel’s advertising spend (1.5% to 2.0% of revenue) is still more reflective of a commoditized portfolio. Hormel’s peers spend about 4.5% on advertising, and we believe for Hormel to maintain its competitive edge, the firm will need to invest a comparable amount, which we continue to forecast.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.