Since before 2020, I’ve been writing about the wisdom in being very selective about the investments you make. That includes taking a defensive approach by looking for industries and businesses whose operations aren’t as sensitive to the and ebb and flow of economic growth.
Prepackaged food stocks like Hormel Foods Corp (HRL), CPB, and KHC have all been facing significant challenges over the last few years related not only to pandemic-driven challenges and opportunities, but on a longer-term basis, from changing consumer preferences. HRL occupies a somewhat different niche than some of these other stocks, however because its products fit nicely into what has clearly been a shift towards healthier, organic choices, with a specific emphasis on proteins. That also fits into related reports regarding China, which is increasing protein imports to make up for domestic supply shortages from the swine flu pandemic in 2018 that ravaged its pork capacity and is expected to continue impacting that area for the next few years. HRL has specifically noted increasing orders for SPAM to China. This is a company that is also taking advantage of opportunities to diversify its business. Last year’s $2.8 billion acquisition of KHC’s Planters-branded snack business gives it a way to begin moderating some of the commodity-driven risk associated with its heavy emphasis on protein products.
A lot of prepackaged food companies have distinct business segments dedicated to foodservice – primarily referring to supply to restaurants – and grocery. One of the interesting ways a number of companies in this industry were forced to adjust in 2020 was to de-emphasize foodservice channels, where forced shutdowns across the globe shuttered restaurants and social dining and focused more on grocery delivery. The recovery of foodservice provides a good tailwind that should work in HRL’s favor in the months ahead, as economic trends indicate an increasing desire by consumers to eat out. There is a counter to that idea right now, of course, coming from the reality that inflation and increasing interest rates are also raising consumer prices as suppliers and restaurants are forced to pass their costs through the supply chain. This is a factor that can be expected to blunt consumer demand more the longer highly inflationary conditions persist.
HRL’s fundamental profile showed some signs of struggle in the first few quarters of 2021, and that contributed to a downward trend in the stock that didn’t find bottom until late September of last year at around $40.50 before rallying into a upward trend that peaked in April above $55. Since then, however, broad market momentum pushed the stock down to a low in June. After staging temporary rallies, to about $51 and $49, respectively in August and November, the stock is now trading near that $44 low point. What does that mean for the stock’s fundamentals and value proposition? Are they both improving enough to make the stock a good bargain in the current environment, or is there more downside ahead? Let’s find out.
Fundamental and Value Profile
Hormel Foods Corporation is a global food company. Its segments include Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other. The Grocery Products segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market, along with the sale of nutritional and private label shelf-stable products to retail, foodservice, and industrial customers. The Refrigerated Foods segment consists primarily of the processing, marketing, and sale of branded and unbranded pork, beef, and poultry products for retail, foodservice, deli, convenience store, and commercial customers. The Jennie-O Turkey Store segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and commercial customers. The International & Other segment includes Hormel Foods International, which manufactures, markets, and sells Company’s products internationally. HRL’s market cap is about $25 billion.
Earnings and Sales Growth: Over the last twelve months, earnings growth was exactly flat, at 0%, while sales decreased by about -5%. In the last quarter, earnings increasing by 27.5%, while sales were 8.2% higher. The company’s margin profile is generally healthy, with some signs that margins are improving; over the last twelve months, Net Income was 8.09%, and increased to 8.52% in the most recent quarter.
Free Cash Flow: HRL’s free cash flow was a little over $857 million over the past twelve months and translates to a modest Free Cash Flow Yield of 3.44%. It should be noted that Free Cash Flow decreased from $1.04 billion in the last quarter, and $939 million a year ago.
Dividend Yield: HRL’s dividend is $1.10 per share, and translates to a yield of 2.41% at its current price. It is also noteworthy that HRL increased their dividend in 2020, 2021 and in the last quarter; it was $.84 per share on an annualized basis until the end of 2020 and $.98 last year, and $1.04 prior to the last increase. HRL is one of a select list of S&P 500 “dividend aristocrats,” having increased its dividend every year for the last 57 years.
Debt to Equity: HRL has a debt/equity ratio of 0.44. This is a conservative number that I think is a little misleading; more revealing is the fact that this ratio increased from 0.16 about a year ago, coincident to the $2.8 billion acquisition of KHC’s Planters snack business. HRL’s balance sheet also shows about $1 billion in cash (versus about $1.77 billion at the end of 2020, and $939.35 million a year ago) and liquid assets against $3.7 billion 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 around $51 per share. That suggests that the stock is moderately undervalued right now, with 11% upside from its current price, and with a useful discount price at around $40.50.
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 downward trend from from its high point in April at around $55 to its low in June at around $44. It also acts as the baseline for the Fibonacci retracement lines shown on the right side of the chart. After the stock’s latest rally from lows near $44 stalled at around $49, the stock has dropped back to find latest, current support at around $45, with immediate resistance at around $46.50. A drop below $45 should test the stock’s 52-week low around $44, while a push above $46.50 should find next resistance at around $48.50 where the 38.2% retracement line rests.
Near-term Keys: HRL’s fundamentals have generally been improving, even as the stock has experienced volatility between high and low points over the last six months. The latest failed rally put the stock into interesting, but not compelling bargain territory, which means that it deserves a place in a watchlist to see if the value proposition improves. If you prefer to work with short-term trading strategies, the best opportunity lies on the bullish side. You could use a push above $46.50 as a signal to think about buying the stock or working with call options, using $48.50 as a useful exit target for a short-term bullish trade. With next support only about $1 away from current support, the reward for a bearish trade isn’t high enough to justify the risk of shorting the stock or buying put options, even if support at $44 doesn’t hold.