Analyst Actions: Hormel Foods Target Price Raised To $32 at Credit Suisse
Modest Q4 Beat and Encouraging Guidance, But The Upside Is Priced In. Remain Neutral; Raising Estimates & TP to $32 (from $27).
"Hormel reported 4Q EPS of $0.43, beating consensus by just $0.01, but gave FY 12 guidance of $1.79-1.89 that is well ahead of consensus of $1.77. The above consensus guidance is being driven by expectations for (1) flat profits in Jennie-O despite difficult comparisons and grain inflation and (2) double-digit growth in Grocery from the contribution of Hispanic brands and renewed Compleats growth. The guidance isn't without risks though as guidance for flat Refrigerated and Jennie-O profit implies high-teens growth in the remaining business. We think the growth in Grocery and Specialty in Q4 even with a tough 53rd week comparison is a good sign. But with the stock trading at a 15% premium to the packaged food group, we see only limited upside for the shares from here. We recommend a more attractive valuation before stepping in."
Increasing Estimates and Target Price. "We are raising our F12 EPS estimate to the mid-point of guidance or $1.85 (from $1.80). This implies 5.5% operating profit growth and 6.5% EPS growth. The $10M decrease in interest expense in F12 is expected to be offset by a 150 bp increase in Hormel's effective tax rate. We are raising our target price by $5 to $32 implying a 16x PE against our new twelve month forward EPS estimate one year from now (Hormel's F13) of $2.00 (from $1.90). This is in-line with the company's 10-year average P/E multiple and probably now justified given the consistent track record for top-line growth and the company's expertise at driving value-added offerings in refrigerated foods that garner higher margins."
Higher Capex in F12. "Hormel is ramping up its capex budget next year with $145M of planned spending up from just $93-97M the last three years. A number of the projects sound like they have been on the backburner during the recession, were looked at again last year, and put in the plan for F12. CFO Feragen noted that some of the spending is related to new products they expect to be introduced in F12."
Still Hungry for Acquisitions. "Hormel continues to be open to acquisitions including opportunities in Asia, but seems now to be focused more on their internal projects. With $300M of free cash flow in F12 and negative net debt, Hormel has the capacity to do a sizable acquisition. Hormel invested $50M in the MegaMex JV in FY 11, and we expect continued investment as the $500 million JV expands its reach and scale in the Hispanic-American community. Given Hormel's limited experience in Asia and low risk tolerance, we think it will take time for Hormel to find a suitable acquisition in the region. Management has expressed its admiration of Sara Lee's meats business in the past, but this may be more than they are willing to take on."
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