Bulked up with acquisitions along with favorable financial results, Hormel Foods is whetting the appetite of investors seeking juicy returns.
The stars are aligned in favor of Hormel ( HRL ) on a few fronts. Low hog prices in its core pork business have helped lift profit margins. Demand for protein products is strong.
Plus, Hormel has made a number of acquisitions that have broadened its reach, such as the 2015 purchase of Applegate Farms, the No. 1 brand in the natural and organic value-added prepared meats category. The buy has helped the company tap into growing demand for natural and organic foods from millennials to aging baby boomers, and expanded its retail channel scope.
Add to that double-digit profit gains in all but one of the past 10 quarters and you have a tasty recipe for success for the maker of Skippy peanut butter, Spam lunch meats and Jennie-O Turkey. Hormel has seen its stock price soar more than 45% since its Sept. 22 low of 29.93. After a recent breakout, it now hovers in the low 40s.
"The stock is performing well," S&P Global Market Intelligence analyst Joseph Agnese told Investor's Business Daily, noting he has a hold rating on the stock. "The commodity environment overall is very favorable with feed costs very low for the turkeys they raise and prices for hogs are down significantly. And they're very well positioned in the food market (where there's) strong demand for protein."
BB&T Capital Markets analyst Heather Jones added: "A key driver of earnings upside and, thereby, the shares has been very significant margin expansion primarily driven by favorable input cost trends in their core pork business, their biggest segment, which sells fresh pork; bacon; pepperoni, etc. into retail and food service; and in their grocery products business with products like Spam."
Recovering From Flu
Although Hormel's turkey business was negatively impacted by the avian flu last year, it did a "phenomenal" job shifting products and selling them at a high margin as a result, Jones added.
Recent acquisitions have helped buoy results. They include the $700 million purchase of the Skippy peanut butter business from Unilever ( UL ) in 2013 and the $450 million purchase of CytoSport Holdings, the maker of Muscle Milk products in 2014.
Its latest buy, the $775 million purchase of Applegate Farms, was Hormel's biggest to date.
"The acquisition was perfectly aligned with our interest in adding brands that resonate with consumers that are younger and more socially engaged," said Chairman and Chief Executive Jeffrey Ettinger on the first-quarter conference call with analysts. "This acquisition has also expanded our distribution into the natural and specialty foods channel that's provided a faster path to creating a significant presence in this high growth, high margin segment."
Jones says the acquisition will help the bottom line.
"But what's important is the acknowledgment that a certain segment of the population is now focused upon where their food is coming from and how those animals were raised," she told IBD. "The wellness trend, in a holistic sense, is not going away. To change a culture and build a brand and credibility in that space would have taken a lot of time and money. It was more expedient to buy a company in that space than to do it on a greenfield basis."
Agnese says, however, the Applegate buy wasn't a game changer as much as a milestone marking where Hormel is headed.
"The game changer is the company has shifted to making acquisitions of value-added products to diversify away from the historical pork and turkey commodity business and more toward a diversified packaged foods company with more stability," he added. "With wider margins and more stability comes a bigger valuation multiple."
Applegate's products are sold mostly through natural and organic foods specialty stores such as Whole Foods Market ( WFM ) while Hormel products are sold through traditional outlets.
"Hormel can leverage the newly acquired relationship (with Applegate) to try to sell products in the natural and organic foods specialty channel," said Agnese. Having the Applegate brand under its umbrella will help Hormel sell products like Muscle Milk and the Hormel brands in the specialty channel, he adds.
Hormel has been serving up some tasty financial results, though not all has gone smoothly. For its fiscal 2016 first quarter ended Jan. 24, earnings climbed 23% from a year earlier to 43 cents a share. Profits were up in all segments except its Jennie-O Turkey Store, which saw operating profit slip 2% from a year earlier as it continued to recover from the impact of the highly pathogenic bird flu that hit Hormel farms in Wisconsin and Minnesota midway through 2015, the company said.
Total company revenue for the quarter fell 4% to $2.3 billion. Analysts polled by Thomson Reuters expect full-year earnings to rise 18% to $1.56 a share. They see a 5% gain in 2017 and a 9% rise in 2018.
Agnese expects full-year 2016 revenue to rise 4.7% from 2015, on benefits from recent acquisitions, including Applegate Farms, he noted in a report. He estimates Applegate sales will total over $350 million in 2016.
In a recent report to clients, Jones projected "relatively modest" earnings growth in 2017.
"Barring a sizeable acquisition, we have difficulty discerning what factors could drive more substantial earnings growth," she noted.
But Jones told IBD she expects Hormel to do more acquisitions.
"I think they're very disciplined allocators of capital," she said. "I don't think they'll do an acquisition just to grow. It has to fit into their strength and it has to be the right price. They have challenges in growing volumes in their core business and have an excellent balance sheet. I think they'll do more acquisitions over the next few years."