Uncertain economic conditions have proven to be a good time to think about stocks that most people tend to overlook because they’re “boring.” These are stocks that also tend to operate in counter-cyclical fashion. It’s been interesting – but not surprising – to see a bit of a resurgence in 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 industries usually considered “trendier” are getting thumped.
In the early stages of the pandemic, these stocks were the clear winners, as consumers clamored to stock up on basic home supplies and other packaged, non-perishable food products, like canned food, prepackaged meat, and so on. While most of the pandemic-induced fear drove that initial surged has faded, it is also a reality that stay-at-home working conditions are likely to remain in place for many working professionals throughout the year, while broad economic pressure from historically high unemployment isn’t going to go away soon. I think those are just two reasons that economists are forecasting steady demand for household goods, including pantry, fridge and freezer foods – which offers a headwind that could make this industry 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, and 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. 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 a year or so ago that ravaged its pork capacity.
A lot of prepackaged food companies – especially those that deal with protein products – have 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 have been forced to adjust in 2020 because of the pandemic is to de-emphasize foodservice channels, where forced shutdowns across the globe have shuttered restaurants and social dining and focus more on grocery, where those same orders have prompted an increase in food storage and consumption at home. HRL may have more risk exposure than its competitors in this vein, as foodservice channels account for more than 30% of revenues. Vaccine news notwithstanding, the current reality is that the pandemic will continue to keep pressure on social activities into 2021, which is why most analysts are predicting foodservice will be a drag on HRL’s results. Even so, the company carries a very strong fundamental profile mean that includes a very healthy balance sheet. The stock has also retraced from 52-week highs by a little over -10% in the last couple of months. Does that mean the stock offers a good value for defensive-minded investors? 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 $25.2 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined -8.5%, while sales also declined -3.25%. In the last quarter, earnings increased 16.2%, while sales were 1.62% higher. The company’s margin profile is healthy; over the last twelve months, Net Income was 9.43%, and 9.68% in the most recent quarter.
Free Cash Flow: HRL’s free cash flow was a little over $762.44 million over the past twelve months and translates to a modest Free Cash Flow Yield of 2.99%. It should be noted that Free Cash Flow was about $761 million in the last quarter, and $619.5 million two quarters prior.
Dividend Yield: HRL’s dividend is $.98 per share, and translates to a yield of 2.08% 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. HRL is on a select list of S&P 500 “dividend aristocrats,” having increased its dividend every year for the last 54 years.
Debt to Equity: HRL has a debt/equity ratio of .16. 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 about $1.73 billion in cash and liquid assets against $1 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 $43 per share. That means the stock is overvalued right now, with -9% downside 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 two years. The diagonal red line traces the stock’s upward trend from May 2018 to its peak, at around $53 in August. It also acts as the baseline for the Fibonacci retracement lines shown on the right side of the chart. After hitting that peak, the stock dropped back to support around $47, and near to the 38.2% retracement line before rallying again into the beginning of November, where it peaked near to the July peak. In the last couple of weeks, the stock has dropped back sharply again and is now sitting right around the 38.2% retracement line. Support should be right around the $47 area where the stock is at right now, which means that if the stock can pivot and move back higher, there should be near-term upside to immediate resistance in the $50 area, or $52 if bullish momentum accelerates. A drop below $47 could see downside to about $45 where the 50% retracement line sits or $43 if bearish momentum picks up.
Near-term Keys: HRL’s fundamentals are solid, especially considering the challenging conditions just about every sector in the market has had to deal with during the pandemic, but the stock’s big bullish move since March means that even with the latest drop in price, there really isn’t a good value-based case to make for HRL right now. HRL would actually have to drop to around $34 to offer a compelling value proposition. If you want to work with this stock, it may be more appropriate to focus on short-term strategies. If the stock pivots higher off of support around $47, you could consider buying the stock or working with call options, with a near-term profit target between $50 and $52. A drop below $47 could act as a signal to consider shorting the stock or to work with put options with a target price between $45 and $43.