Shares of Hormel Foods Corporation (HRL), a producer of meat and food products, ended the week roughly flat. On Thursday, the company reported its third quarter results.
Third Quarter Results
Hormel Foods reported third quarter revenues of $2.0 billion, up 5% on the year. Revenues were in line with the analysts consensus, driven by sales of Spam. Net income rose 13% from $98.5 million to $111.2 million. Diluted earnings per share rose from $0.36 last year to $0.41 this year. Earnings per share came in line with analysts expectations.
CEO and Chairman Jeffrey Ettinger commented on the results:
"We had an excellent quarter, with earnings per share and sales up 14 percent and 5 percent, respectively. All five segments reported increased earnings, led by our Grocery Products segment. Our strong sales growth across multiple segments demonstrates that our products are connecting well with consumers."
Revenues in the grocery business grew 21% to $297.2 million. Operating profits advanced 32% to $40.0 million. Sales and profits were driven by the acquisition of DON Miguel foods. Excluding the acquisition, sales were up 3%.
Sales in the refrigerated food business were essentially unchanged at $1.04 billion. Operating profits rose 7% to $60.8 million as a result of strong performance at Meat Products and Foodservice. Lower pork operating margins proved a drag on the results.
Jennie-O Turkey Store
Sales at the Jennie-O Turkey business rose 7% to $351.6 million. Operating profits rose 12% to $39.1 million. An improved product mix offset higher feed costs and lower commodity meat prices.
Sales at the specialty foods division rose 11% to $230.1 million. operating profits rose 18% to $21.5 million. Sales grew across the board, in bulk and nutritional items, private label canned meats and ingredients.
Ettinger commented about Hormel's future:
"Our excellent results in the third quarter give us momentum heading into the fourth quarter and put us on track to achieve results consistent with our annual guidance of $1.79 to $1.89 per share."
The company thinks that grain costs will present a challenge. However the strength of the business model and vibrancy of the portfolio continues to support sales and earnings to end 2012.
The full year earnings per share guidance came in line with analysts consensus of $1.85 per share.
Hormel Foods ended the third quarter with $610 million in cash, equivalents and marketable securities. The company operates with $250 million in long-term debt, for a net cash position of $360 million.
For the first nine months of 2012, Hormel Foods generated revenues of $6.06 billion. The company net earned $371 million, or $1.37 per share. At this rate, the company is on track to generate $8.2 billion in annual revenues and earn approximately $1.84 per share.
The market values Hormel Foods at almost $7.6 billion, or about $7.2 billion for its operating assets. This values the firm at 0.9 times annual revenues and roughly 15 times annual earnings. Competitor H. J. Heinz (HNZ) trades at 1.5 times annual revenues and at 20 times trailing annual earnings.
Currently, Hormel Foods pays a quarterly dividend of $0.15 per share, for an annual dividend yield of 2.1%.
Year to date, shares of Hormel Foods trade flat. Shares moved in a relative tight trading range of $26-$31 per share, ending on Friday around the midpoint of that range.
Over the past five years, shares advanced some 60%. The company steadily grew its annual revenues from $6.8 billion in 2008, to an expected $8.2 billion in 2012. Earnings grew even faster as the company increased its profitability margins. Earnings per share rose from $1.04 to an expected $1.84 over that time period. Dividends increased in line, from $0.37 to an expected $0.60 per annum.
Hormel is a perfect long-term addition for a long-term portfolio. The business is consistently growing revenues, and boosting margins, while being conservatively financed. This leaves enough financial room for further acquisitions. I expect shares to set new all-time highs around $31 later this year.