Hormel Foods Corporation

HRL Details

Hormel Foods Corporation (NYSE: HRL) is a global top branded food company  with prominent brands comprising of Skippy®, SPAM®, Hormel® Natural Choice®, Columbus®, Applegate®, Justin's®, Wholly®, Hormel® Black Label®, among others.

Q2FY21 Result Performance (For the Period Ended 25 April 2021)

• The company has reported a record sales performance in Q2FY21 with net sales growth of 7.6% YoY to $2.6 billion driven by growth across segments, barring grocery products which experienced 8% decline in net sales and 14% decline in volume sales on YoY basis. Overall volumes during the period declined by 3% to 1.2 billion lbs.
• Due to the impact of higher raw material and feed costs, the operating margin fell to 11.1% from 12.1% in fiscal 2020.
• While the company witnessed a 2% growth in pre-tax earnings to $293 million, diluted earnings per share however stood flat at $0.42 compared to Q2FY20.
• The company reported cash flow from operations of $156 million in Q2FY21, down 57% owing to an intentional increase in inventory to cater to elevated demand.

Consolidated Financial Snapshot (Source: Company Reports)

Launched Plant-Based Pepperoni Style Topping

The company, on 17 August 2021, introduced Happy Little Plants® pepperoni style topping.  It has developed this plant-based pepperoni style topping by closely working with pizzerias, chefs, foodservice operators, and pizza experts that cook and taste similar to that of traditional pepperoni.

Third Quarter Results

• HRL posted results for the third quarter of FY 2021. It posted record net sales amounting to $2.9 Bn in Q3 FY 2021, reflecting a rise of 20% YoY and organic net sales rose by 14% YoY. The company witnessed net sales growth from all the 4 segments as well as from all the 4 sales channels.

• HRL’s operating income was $207 Mn, down 17% YoY and its adjusted operating income was $248 Mn, down 1% YoY.

Outlook

The company is expecting to post record sales again in Q4 FY 2021, along with the improving margins as and when additional pricing actions come into effect. In fiscal 2021, the net sales is expected to be between $11.0 Bn - $11.2 Bn and diluted EPS is expected in the range of $1.65 - $1.69. Notably, the fiscal 2021 outlook includes the acquisition of the Planters^® snack nuts business.

Key Risks

The company is exposed to the risk of changes in national or global economic conditions that could severely hit  its business. Further, the company is susceptible to the risk of reduction in consumer spending rates as well as shifts in consumer product preferences.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

The stock has been valued using EV/Sales multiple based relative valuation (on an illustrative basis) and the target price so arrived reflects the potential rise of low double-digit (in % terms). A slight discount has been applied to EV/Sales Multiple (NTM) (Peer Average), considering the risks related to the business as well as fall in the operating income in Q3 FY 2021 on the YoY basis.

For the purposes of relative valuation, peers like General Mills Inc (GIS.N), Alico Inc (ALCO.OQ), among others have been considered.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the current market price of $43.57 per share, down by 4.6% on 2^nd September 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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