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Following the strong third quarter results on August 20, the analysts have turned optimistic on Hormel Foods Corporation (NYSE:HRL) due to improved demand on account of gradual market recovery. Reported earnings per share (EPS) of 63 cents surpassed the Zacks Consensus Estimate by 4 cents. Thus, fiscal 2010 EPS guidance range increased to $2.85–$2.91 from $2.75–$2.85.

Earnings Review
Hormel posted strong results for the third quarter of fiscal 2010 with an EPS of 63 cents, up from 57 cents in the year-ago quarter. Reported EPS also surpassed the Zacks Consensus Estimate of 59 cents. Net income stretched 13.6% year over year to $85.4 million from $77.2 million in the third quarter of 2009. The increase was driven by revenue growth coupled with cost maintenance.

During the quarter, net revenue was $1,730.5 million, up 9.9% from $1,574.4 million in the corresponding period of the previous year and $1,681 million according to the Zacks Consensus Estimate. This increase is attributable to increased revenues in all segments.

During the quarter, Hormel wiped off its entire long-term debt burden of $350 million and reclassified into current maturities. At present, the company has sufficient cash and cash equivalent and marketable securities of $427.1 million, an increase from $405.2 million at the end of the previous quarter, to meet its debt burden of $350 million. Thus, the company has strong liquidity positions.

Detailed discussion of the earnings release can be found at: Hormel Surpasses Expectations

Agreement of Analysts
The strong results in the third quarter, driven by cost maintenance and revenues growth attributable to the gradual recovery in the market demand, inspired analysts to increase their estimates for future. Analysts also raised their estimates to comply with the revised EPS guidance range, which increased from $2.75–$2.85 to $2.85–$2.91.

Hormel’s strong liquidity position with no long-term debt is another reason for being optimistic on the stock as it will enhance Hormel’s acquisitions, which is expected to be its key growth strategy in the future.

For fiscal 2010, out of the 10 analysts covering the stock, 8 analysts have raised their estimates, while none took a downward step. For fiscal 2011, 7 analysts out of 11 analysts covering the stock moved in the upward direction, while only one remained pessimistic. Thus, the overall trend was positive.

Magnitude of Estimate Revisions
For fiscal 2010, estimates went up from $2.83 to $2.88 and for fiscal 2011; it increased to $3.04 from $2.98.

With respect to earnings surprises, Hormel had a positive track record in the preceding four quarters. In each of the last four quarters it recorded positive surprises with average positive earnings surprise of 12.61% over the last four quarters, meaning that Hormel has beaten the Zacks Consensus Estimate by that measure.

Our Recommendation
Hormel posted strong results for the third quarter of fiscal 2010 based on improved demand attributable to gradual market recovery. Reported EPS of $0.63 surpassed the Zacks Consensus Estimate by $0.04. Fiscal 2010 EPS guidance range also increased in the range of $2.85–$2.91.

The company has been strengthening its position through acquisitions, which is expected to be its key growth strategy with strong liquidity, given nil long-term debt. Though, the food market is highly competitive, a greater share of value-added branded products in Hormel’s product-mix will help to strengthen its margins and reduce exposure to commodity prices in the long term.

However, huge dependence on volatile raw material costs is riskier. Thus, we maintain our Neutral recommendation on the stock. The stock currently retains its short term “Hold” rating, equivalent to the Zacks #3 Rank.

Source: Earnings Scorecard: Hormel Foods