Hormel Foods Benefiting from Recession; Is Swine Flu a Risk?

 |  About: Hormel Foods Corporation (HRL)
by: Vahan Janjigian, CFA

Hormel (NYSE:HRL), the maker of SPAM, is a leading supplier of pork, turkey, and beef products. In fiscal 2008, 53.5% of sales consisted of perishable meats, 19.2% of poultry (primarily turkey), 17.1% of shelf-stable foods, and 10.2% of other products including nutritional supplements, sweeteners, and seasonings.

The Refrigerated Foods segment generated 53% of fiscal Q1 2009 sales. It provides branded and unbranded fresh and frozen pork and beef products, which are available raw, marinated, or precooked.

In addition to Hormel brand products, it sells Lloyd’s Barbecue meats, Farmer John pork products, and Dan’s Prize beef products. Customers include grocery retailers and foodservice operators such as restaurants and delicatessens.

The Jennie-O Turkey Store (JOTS) segment produced 18% of sales. It offers branded and unbranded fresh and frozen turkey products for retail and foodservice customers. Products include fresh ground turkey, deli-sliced sandwich meat, turkey franks, and oven ready whole turkeys.

The Grocery Products segment accounted for 14% of sales. It consists of a variety of branded, shelf-stable foods found in the center isles of grocery stores. These include SPAM, Hormel chili, Hormel Compleats microwaveable meals, Dinty Moore stews, CHI-CHI’S and Herdez Mexican food products,Valley Fresh chicken products, Stagg chili, and Not-So-Sloppy-Joe sauce. The Specialty Foods segment, which was responsible for 11% of sales, includes sugar, sugar substitutes, salt, pepper, dessert mixes, drinks, and nutritional foods and supplements. Brands include Diamond Crystal, Century Foods International, and Hormel Specialty Products. It also supplies private label canned meats to retail and foodservice customers.

Other sales consist of HRL’s products sold in international regions, including Australia, Canada, China, England, Japan, Mexico, and Micronesia. This represented 4% of sales.

Thanks to the recession, consumers are preparing more meals at home. Hormel benefited from this trend as net sales in fiscal 2008 climbed 9.1% to $6.75 billion.

However, the gross profit margin shrank 31 basis points to 22.53% due to higher costs for feed and energy and an oversupply of turkey. The operating profit margin declined 21 basis points to 7.6%. Net income fell 5.4% to $285.5 million or $2.08 per share. Net sales in fiscal Q1 2009 climbed 4.2% year-over-year to $1.69 billion. Higher costs pressured the gross and operating profit margins by 193 and 163 basis points, respectively, to 16.12% and 7.68%. Net income declined 7.7% to $81.4 million or 60 cents per share.

Significant investment risks include higher hog, feed, and energy costs and an oversupply of turkey. Swine flu also poses a challenge. While there is no evidence that consumers can contract the disease by eating pork, they may decide to avoid pork products anyway. Indeed, China and Russia have already banned certain pork imports. However, swine flu fears may boost sales of HRL’s non-pork products.

Management is forecasting a 3-8% increase in earnings per share for fiscal 2009. Longer-term growth prospects are also promising. Management estimates that products introduced since 2000 could generate $2 billion in annual sales by 2012. The stock offers a steadily increasing dividend that yields 2.4%.

Click to enlarge