Hormel Foods: A Long-Term Growth Story And One Of 'The Best Stocks For Next Decade And Beyond'

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Includes: HRL
by: Ramani

Summary

51 years of continuous dividend increases.

89 years of uninterrupted quarterly dividends.

The current dividend yield of 2.2% and around its best yields in its recent history makes it attractive.

125+ years of heritage.

CMP around $30.50.

The past 10-year historical data:

Year Revenue USD Mil Gross Margin % Operating Margin % Net Income USD Mil Debt/Equity
2007 6,193 16.20 7.80 302 0.19
2008 6,755 15.70 7.70 286 0.17
2009 6,534 16.80 8.20 343 0.16
2010 7,221 17.20 9.00 396
2011 7,895 16.90 9.10 474 0.09
2012 8,231 16.20 9.30 500 0.09
2013 8,752 16.10 9.20 526 0.08
2014 9,316 16.80 10.00 603 0.07
2015 9,264 19.50 11.50 686 0.06
2016 9,523 22.70 13.90 890 0.06
TTM 9,398 22.50 14.00 886 0.05
Growth Years 7 5 7 8
CAGR 3yrs 2.85% 19.16%
CAGR 5yrs 3.82% 13.43%
CAGR 9yrs 4.90% 12.76%
Absolute in 9 Years 53.77% 194.70%

The company has positive growth in its revenue and net income in the past 3yr/5yr/9yr periods. The revenue growth in 7 of 9 years and net income growth in 8 of 9 years shows the consistency and makes me comfortable.

The increasing Gross Margin % and Operating Margin % bodes well for the increase in Net Income and shows the competitive advantage enjoyed by the company.

* Consumer Analyst Group of Europe (CAGE) Conference presentation slide.

A top line growth of 5% along with margin expansion of 10% is expected by year 2020 as presented in their Consumer Analyst Group of Europe (CAGE) Conference presentation slides.

* Consumer Analyst Group of Europe (CAGE) Conference presentation slides.

A very low debt-equity ratio confirms that the company can make M&A deals for further growth. Finance management is within acceptable norms. Share buybacks to increase wealth creations are possible. Moody’s Credit rating of A1 and S&P's A gives comfort regarding the finance management.

* Consumer Analyst Group of Europe (CAGE) Conference presentation slides.

The per share EPS, Dividend and related historical information is given below

Year Earnings Per Share USD Free Cash Flow Per Share * USD Dividends USD Payout Ratio % * Shares Mil
2007 0.54 0.38 0.15 27.70 557
2008 0.52 0.27 0.18 35.50 549
2009 0.63 0.58 0.19 33.40 542
2010 0.73 0.74 0.21 29.20 541
2011 0.87 0.72 0.26 29.30 544
2012 0.93 0.72 0.30 32.20 538
2013 0.97 1.03 0.34 35.50 540
2014 1.12 0.84 0.40 35.30 540
2015 1.27 1.66 0.50 38.30 541
2016 1.64 1.31 0.58 36.30 542
TTM 1.64 0.63 38.40 541
Growth Years 8 4 9
CAGR 3yrs 19.13% 19.49%
CAGR 5yrs 13.52% 17.41%
CAGR 9yrs 13.14% 16.21%
Absolute in 9 Years 203.70% 286.67% -2.69%
EPS - Projected - Last three years CAGR 1.95
EPS - Analysts' Estimate - Current Year 1.57
EPS - Analysts' Estimate - Next Year 1.66
Dividend 0.68
Likely next Dividend Revision Month

Jan-18

A slide from HRL 2017-Q2 report shows the segments and their profitability.

* Slide from HRL – 2017-Q2 reports

The company has grown its EPS growth rate in the past 3yr/5yr/9r periods. An EPS Growth of 13%+ is possible with continued buyback of shares into 2020.

The last dividend payout is far less than 40% and hence future dividend increases look promising at a double-digit growth rate going into 2020. The next dividend increase is expected in Jan 2018.


* A CAGE presentation slide from Mr. Jim Sheehan, Senior Vice President and CFO, HRL

Concerns:

HRL lowered its full year guidance due to high commodity price volatility.

HRL expects “continued earnings pressure from higher input costs for key raw materials such as bellies, pork trim, and beef trim.”

“While we have communicated price increases in many categories, the increases will not be fully effective until late in the fourth quarter. Jennie-O Turkey Store continues to be adversely affected by unfavorable market conditions, as the industry has not returned to normalized turkey production levels. For these reasons, we are lowering our full year guidance to $1.54 - $1.58 per share from the low end of $1.65 to $1.71 per share. In the face of a challenging year, we are focused on our strategic initiatives and are committed to maintaining a long-term perspective on our decisions.” (2017-Q2 reports).

Valuation:

I like Chowder’s quick valuation principles (Thank you Chowder).

a) A dividend yield of 2.2% + the last 5 years' dividend growth rate of 17.4% give a Chowder number of 19.6.

b) Assuming that this dividend growth rate cannot be maintained for too long and the dividend growth in the long run can at best mimic the EPS growth rate, the Chowder number can be taken as 2.2% + the 5-year EPS growth rate of 13.5% to arrive at a Chowder number of 15.7.

c) The net income has grown at 12.8% over the previous 9 years and it is the lowest of 3yr/5yr/9yr growth rates. Taking this as the possible lowest future growth rate, the Chowder number will still work out to 12.8 + 2.2 = 15, which is within the Chowder's norm of 15 for fast growth, low dividend yield companies.

d) It will take approximately 19 years to earn back CMP with the dividends received growing it at the 9-year average growth rate of around 16.2% and discounted at an assumed inflation rate of 5%.

e) It will take approximately 27 years to earn back CMP with the dividends received growing it at 10% pa and discounted at 5%.

f) It will take approximately 26 years to earn back CMP with the dividends received, growing it at 5% pa without any money value adjustment.

g) It would take approximately 12 years for the cumulative value of EPS grown at the average growth rate of 15.12% (average of 3yr/5yr/9yr net income growth rate) and discounted at 5% to exceed CMP (an indication of how fast or slow the investment can grow at these rates).

h) It would take approximately 14 years for the cumulative value of EPS grown at the average growth rate of 10% and discounted at 5% to exceed CMP (an indication of how fast or slow the investment can grow at these rates).

i) These short term concerns can keep the market depressed in the near term or until such time a better guidance is provided. The current P/E of 19.1 is not a cheap valuation, but it is the lowest P/E multiple in the previous 3 years. If the increased costs are passed on and profitability is returned to previous levels, the subdued market prices will no longer continue.

For short term the price is just anyone's guess. From a technical aspect, if the price dips more than 2 or 3%, it can further drag the price down to multi-year lows. The current price is at around the 2015 second half transacted rates and around the lowest in the past 2 years. I view the current market price as an opportunity to go long.

Final Notes:

I intend adding HRL to my 'long-term portfolio for the next decade and beyond' since it has the attributes to stay for decades and add value to investment. I have added some at $ 30.60. I will add more to complete my intended full position (say 2.5% of my total new portfolio value) at around $30.50. I will add more moderate quantities (limited to another 1% or 2%), if the price dips to $30 or 29.80. If I add at lower prices, I will retain them and offload the high cost ones at appropriate value/time I decide.

Views of readers will be appreciated and well taken.

Disclosure: I am/we are long HRL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am/we are long HRL and will be adding more within the next 24 hours or in the immediate future. Please buy or sell at your own risk. The views are personal and not a recommendation to buy or sell. The HRL's presentation slides include forward looking statements based on management’s views and assumptions at the time of those presentations. Actual events may differ materially. Other forward looking statements or future projections are just my views and actual may differ materially. I cannot be held responsible for any of these and/or any financial decisions based on these views and/or this article.