Company Overview: 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 Details

Healthy First Quarter FY2018 Performance: Hormel Foods Corp (NYSE: HRL) has reported 27% rise in the diluted earnings per share to $0.56 for the first quarter of FY 18 while the sales grew 2% to $2.3 billion and the group’s organic net sales growth was witnessed at 1%. The volume fell 4% to 1.2 billion lbs. while the organic volume fell by 2%. The advertising expenses fell to $40 million as compared to $52 million due to the timing. However, the full year 2018 advertising expenses are expected to increase by more than 20 percent. The selling, general and administrative expenses have increased due to transaction costs of two cents earnings per share related to the Columbus Craft Meats acquisition. The operating margin fell to 13.2% from 15.6%. The higher hog costs, one-time transaction expenses related to the Columbus acquisition, and increased freight expenses are the primary contributors to the operating margin decline.
 
[‎29-‎03-‎2018 11:44]  Hina  Chowdhary: 

Hormel Foods (Source: Company Reports)
 
Decent Balance sheet position: During the first quarter of 2018, the working capital has decreased to $625 million, primarily related to an increase in short-term debt and lower accounts receivable. The capital expenditures were $54 million compared to $38 million last year. Depreciation and amortization expenses are of $39 million compared to $31 million last year. Furthermore, the cash on hand has decreased to $386 million while total debt has increased to approximately $880 million, due to the Columbus Craft Meats acquisition. The debt is split between short-term borrowings of $255 million and long-term borrowings of $625 million. Nonetheless, HRL is still in a decent financial position to fund any other capital needs.

Segment performance: The group’s Refrigerated Foods represents over 50% of their sales while Grocery products is their next largest segment at about 25% of the sales. For the first quarter of FY 18, HRL’s segments Grocery Products, Refrigerated Foods, and International met the company’s expectations. The company’s organic sales growth was led by many key brands including retail sales of Hormel Black Label bacon, Wholly Guacamole dips, Muscle Milk protein beverages, and SPAM products in addition to foodservice sales of Hormel Bacon 1 fully cooked bacon and Hormel Fire Braised meats. Meanwhile, HRL has created a new deli division in Refrigerated Foods, which would represent almost $1 billion in annual sales and will be the company’s next growth engine. On the other side, their Food Service business, which is about 30% of their business is housed in both Refrigerated Foods and Jennie-O Turkey Store business. The group is able to sell to a number of different segments, that vary from hotels, restaurants, hospitals, to colleges and universities via their Food Service business. On the retail side of the business, which is over 60% of the business, the group got strong brands in their Refrigerated Foods business, in Jennie-O Turkey Store and in their Grocery Products segment. They have 35 brands that are number one or number two in the categories in which they compete while cover the entire footprint of any retail grocery store with those 35 brands.
 

Segment performance (Source: Company reports)
 
Rising dividends: HRL has declared a decent quarterly dividend on the Company's common stock, to be paid on May 15, 2018, to stockholders of record at the close of business on April 16, 2018. In the first quarter of FY 18, HRL has paid the quarterly dividend at the annual rate of $0.75 per share, which is a 10 percent increase over the prior year. With 52 consecutive years of dividend increases, HRL is an S&P 500 Dividend Aristocrat and the company intends to continue the track record. Moreover, in the first quarter of FY 18, HRL’s share repurchases have totaled $25 million, which represent 0.7 million shares purchased.
 

Growing Dividend Distributions (Source: Company reports)
 
Investing for Employees and Communities: HRL apart from awarding over 20,000 employees stock options, will raise the starting wage for all employees to $13 per hour by the end of FY 18 and to $14 per hour by the end of FY 20. The company has also pledged an additional $25 million in donations over the next five years.

Leadership Appointments: The group has appointed Jeff Frank, president of MegaMex Foods (Orange, Calif.), as the vice president of Foodservice marketing at the company’s global headquarters (Austin, Minn.). Frank has replaced David Weber, who was recently promoted to vice president of Foodservice sales. Moreover, HRL has appointed Ryan Michaelis, vice president of sales and marketing at MegaMex Foods, as the president of MegaMex Foods. Michaelis will report to the MegaMex Foods Board of Managers. MegaMex Foods is a joint venture between Hormel Foods and Herdez del Fuerte and brings out the authentic Mexican flavors to every table with growing brands like Wholly Guacamole dips, Herdez products and CHI-CHI’s products.

Enhanced Outlook: For FY18, the group expects an effective tax rate of between 17.5 to 20.5 percent compared to original guidance of 32.3 to 33.3 percent. The change is primarily due to the decrease in the statutory tax rate, one-time discrete tax events, and the adoption of new accounting standards related to stock compensation. The full year cash flow benefit is expected to be in the range of $100 – $140 million. For FY19 and beyond, HRL expects an effective tax rate of between 21.5 to 24.5 percent. Moreover, for FY 18, HRL will increase its earnings through the three recent strategic acquisitions and increased capital investments for value-added capacity. The company’s expectations for Grocery Products, Refrigerated Foods and International have not changed, but expect a slower-than-expected recovery at Jennie-O Turkey Store as HRL continues to work through a difficult operating environment in the turkey industry. The freight costs would continue to be a headwind for the balance of the year and the company is working to mitigate the impact through long-term sustainable solutions across the entire supply chain. Additionally, HRL has upgraded the earnings guidance while left the sales guidance unchanged. The earnings per share for FY 18 are now expected to be in the range of $1.81 – $1.95 compared to the previous projection for earnings per share of $1.62 – $1.72. The net sales for FY 18 is expected to be in the range of $9.70 – $10.10 billion. In addition, the full year capital expenditures are expected to total $425 million. The key projects include bacon capacity increases in Wichita, Kans., facility, a new whole bird facility in Melrose, Minn., modernization of the Austin, Minn., plant, and projects designed to increase value-added capacity. Full year depreciation and amortization expenses are expected to be approximately $145 million.
 

Branded Presence (Source: Company Reports)
 
Stock Recommendation: The group has built a solid reputation over many years and managed to deliver earnings growth in 28 out of the last 32 years as well as has been able to enhance the dividend every year for the last 52 years including double-digit increases over the last nine years. On the overall industry dynamics, the labor market scenario and the rising consumer confidence would benefit consumer staples stocks in the near future. Further, Trump’s latest tax policy is expected to offer a big push to consumer goods companies and boost their investments. Meanwhile, the group is also focusing on their International business wherein the sales rose during the first quarter driven by addition of Ceratti, increased exports and strong business in China. HRL also does not expect a material impact from 25% Chinese tariffs on US Pork exports. Production of SPAM is now up and running in-country in China and sales are contributing to the top-line. In the long term, the group aims to have a 5% top line growth, 10% bottom line growth and 15% innovation by 2020. We rate a “Buy” on the stock at the current price of $33.66
 

HRL Daily Chart (Source: Thomson Reuters)

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