The market is in full-blown bear market mode right now, and that means that a lot of stocks have really been getting beat up since the major indices all hit new all-time highs in mid-February. As of this writing, the S&P 500 has been testing support around 2,350 quite a bit over the last couple of days. I think that it’s encouraging to see that support level hold, and could even be a sign that the market is starting to consolidate and stabilize. If that is the case, broad market volatility should start to drop, and that will probably enhance the quality of a lot of the stocks I’ve been watching for income trades even more.
In the meantime, I think one of the smart things we can do to keep our money working for us is to work with stocks that tend to operate in counter-cyclical fashion. It’s been interesting – but not surprsing – over the last week to see stocks in the Food Products industry, for example show a lot more resilience, and in some cases even go up in price while stocks in trendier industries are getting hammered.
Considering the way consumers are clamoring to stock up on home storage items – check the empty shelves by midmorning in grocery stores where water and toilet paper is usually placed at the beginning of the day – I guess it shouldn’t be surprising to see demand increasing for other packaged, non-perishable food products, like canned food, prepackaged meat, and so on. That’s why I think this industry is going to continue to be a natural fit for anybody that wants to find places to invest that could represent “safe havens” within the market that aren’t as sensitive to economic downturns.
Prepackaged food stocks like Hormel Foods Corp (HRL), CPB, KHC have all been facing significant challenges over the last couple of years related to changing consumer preferences. HRL occupies a somewhat different niche than some of these other stocks, however because its products fit nicely into that shift towards healthier choices, with a specific emphasis on proteins. Recent news also seems to indicate the company’s products fit nicely into the public’s current desire to “hunker down” and get braced for the worst. Does the additional fact the stock has a strong fundamental profile mean that it is also a good value? Let’s take a look.
Fundamental and Value Profile
Hormel Foods Corporation is engaged in the production of a range of meat and food products. The Company operates through four segments: Grocery Products, which is engaged in the processing, marketing and sale of shelf-stable food products sold for the retail market and health and also consists of nutrition products, including Muscle Milk protein products.; Refrigerated Foods, which consists of the processing, marketing and sale of branded and unbranded pork, beef, chicken and turkey products for retail, foodservice and fresh product customers; Jennie-O Turkey Store (JOTS), which consists of the processing, marketing and sale of branded and unbranded turkey products for retail, foodservice and fresh product customers; and International & Other, which includes Hormel Foods International Corporation, which manufactures, markets and sells the Company products internationally. HRL’s market cap is about $26.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings improved modestly, at 2.27%, while sales dropped were flat, but positive at 1%. In the last quarter, earnings declined -4.26%, while sales were down -4.68%. The company’s margin profile is healthy; over the last twelve months, Net Income was 10.3%, and declined only slightly to 10.18% in the most recent quarter.
Free Cash Flow: HRL’s free cash flow was a little over $619.5 million over the past twelve months and translates to a modest Free Cash Flow Yield of 2.4%. It should be noted that Free Cash Flow was about $863 million a year ago – which means this important measurement has declined more than -28% over the last year.
Dividend Yield: HRL’s dividend is $.93 per share, and translates to a yield of 1.93% at its current price. It is also noteworthy that HRL has increased their dividend; it was $.84 per share on an annualized basis as recently as October of last year.
Debt to Equity: HRL has a debt/equity ratio of .05. This is a very low number that is clearly representative of the company’s conservative use of leverage and its approach to debt management. In the last quarter, HRL’s balance sheet showed a little over $739 million in cash (a number that has improved steadily from about $512 million in January 2019) and liquid assets against $309 million in long-term debt.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target arou640nd $33 per share. That means the stock is significantly overvalued, with -31% upside from its current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: This chart traces the stock’s movement over the last year. The diagonal red line traces the stock’s upward trend from May 2019 to its peak, which the stock hit earlier this week with a big upside volatility spike. It also acts as the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock dropped from a peak around $46 in February with the rest of the market, but more recently has seen an opposite and equal move to the upside as investors have started to flock into the stock as a potential “safe haven” play. Current support is at the 38.2% Fibonacci retracement line at $46; if the stock drops below that level, it should be expected to drop back to somewhere between $40 and $42 based on the recent bounce and previous support pivots in that range. The stock’s current surge has pushed back near to all-time highs, which makes forecasting an upside price if bullish momentum continues pretty tough. Previous history indicates normal moves between support and resistance are between $2 and $3 per share, which puts a near-term peak around $51 per share.
Near-term Keys: HRL’s fundamentals are nice, but the stock’s big bullish move in the last year (not to mention the last couple of days) means that there really isn’t a good value-based case to make for this stock right now. If you want to work with this stock, it may be more appropriate to focus on short-term strategies. If bullish momentum continues, you could consider buying the stock or working with call options, with a top-end profit target between $50 and $51. A break below $46, could act as a signal to consider shorting the stock or to work with put options with a target price at around $42.