HRL Market Research & Analysis Report
Updated Oct 21, 2015

Hormel Foods Corporation (NYSE: HRL)

Trade Rationale:

HRL has demonstrated a pattern of positive technical signs, and it looks undervalued at this price level. HRL has exceeded 3 and met 1 of the last 4 earnings estimates. HRL is good investment for the long term and a stock for dividend lovers, it has increased its dividend for 49 consecutive years. Our overall score for HRL is 8.2.

Stock Price Trends

Market cap 17.59B
Yesterday's close $65.94
52-weeks range $50.06 – $66.69
Technical analysis Positive

HRL Score: 8.2

Intrinsic value of the stock 8
Financials 6
Sentiment 6
Analyst ratings 7
Earnings Consistency 9
Total Debt/Equity 9
Quarterly EPS change 6
Annual Earnings Growth 7
Current Price Level 10
P/E Ratio 5
Insider Ownership 10
Technical Analysis 7
Sector:Consumer Goods
Industry:Meat Products

Growth and Balance Sheet

The company reported net income of $147 million, or 54 cents diluted earnings per share for the third quarter of fiscal year 2015 ending July 26. That's up from net income of $138 million, or 51 cents diluted earnings per share for the same quarter last fiscal year. Net revenue for the third quarter was $2,189 million, down from $2,285 million for the same quarter last fiscal year. Company’s segments, with exception of Jennie-O Turkey Store segment, recorded increase in operating profit in comparison to the same quarter last fiscal year. Grocery Products segment operating profit was up 57.2% to $53 million, primarily due to lower input costs. Refrigerated Foods segment operating profit was up 8.5% to $98 million. Jennie-O Turkey Store segment operating profit was down 45.4% to $35 million, primarily due to substantial impact of the avian influenza outbreak earlier this year. Specialty Foods segment operating profit was up 79.5% to $31 million, primarily due to the addition of MUSCLE MILK® protein nutrition products and synergies captured within the CytoSport and Century Foods supply chain. International & Other segment operating profit was up 3% to $19 million, primarily due to higher royalties and strong performance of the China business. Company’s gross margin was up over 270 basis points to 18.70% for this quarter, from 15.93% for the same quarter last fiscal year, primarily due to lower pork input costs. The operating margin improved from 9.39% for last fiscal year’s third quarter to 10.56% for the current quarter. Net cash provided by operating activities for the thirty nine weeks ending July 26, 2015 was $690 million, up from $394 million for the thirty nine weeks ending July 27, 2014. Cash and cash equivalents as of July 26, 2015 were $349 million, in comparison to $334 million as of October 26, 2014. HRL forecasted EPS for the fourth quarter of fiscal year 2015 is expected to be from 67 cents to 69 cents, compared to actual EPS of 63 cents for the fourth quarter of last fiscal year. The financial strength indicators of the company are at satisfactory levels. Company’s current ratio is 1.61 and the industry average ratio is 1.72. The quick ratio of 0.82 is also worse than the industry average of 1.33. The interest coverage ratio of 82.12 is at much healthier levels than the industry average of 5.95. In terms of efficiency and effectiveness, the asset turnover ratio of 1.67 is better than the industry average of 0.91; the inventory turnover ratio of 7.44 is also at better levels than the industry average ratio of 6.02; and the ROE of 17.87% is better than the industry average of 10.6%. 

Valuation

HRL PE stands at 26.82 above the industry average of 20.1, and above the stock market average represented by the S&P 500 P/E of 21.53. The company is currently trading above the maximum P/E ratio of 15x, and over the last five years, the company’s shares have traded in the range of 15.71x to 23.56x trailing 12-month earnings. HRL's current Price/Sales of 1.85 is above the average of its industry of 1.64. HRL’s head to head comparison to its main competitors shows that the company has one of the highest gross margin, but one that is below the industry average. The achieved operating margin by the company is better than the achieved margins by the competition and leveled with the industry average. The company quarterly revenue growth rate is negative and the worst result out of the achieved growths by the competition, and also worse than the industry average. The company trades at the highest P/E and P/S ratios from the selected peers. HRL’s twelve trailing months EBITDA of $1.18 billion is the lowest result from the selected competitors. The stock is currently trading below its intrinsic value of $79.14, this suggests that the stock is currently undervalued at these levels. The beta of 1.01 implies about the same volatility of the stock with respect to the S&P 500. HRL has shown favorable earnings consistency over the last five years. Moreover, company’s earnings have increased by 12.01% over the same period. The current quarter earnings in comparison to the same quarter last year have increased by 5.9%. HRL’s Total Debt/Equity of 15.24 is below the required maximum, and it is below the industry average of 58.1. HRL’s current price levels are below the maximum level, only 1.12% below the 52 week high of $66.69, and the technical analysis give positive view of the stock. The majority of analyst ratings are hold. HRL has a twelve trailing month dividend payout ratio of 34% and trailing annual dividend yield of 1.50%.

About HRL

Hormel Foods Corporation is primarily engaged in the production of a variety of meat and food products and the marketing of those products throughout the United States and internationally. The Company markets its products through Hormel Foods International Corporation, a wholly owned subsidiary. The Company operates in five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store (JOTS), Specialty Foods, and International & Other. The meat products are sold fresh, frozen, cured, smoked, cooked, and canned. Perishable meat includes fresh meats, refrigerated meal solutions, sausages, hams, wieners, and bacon. The Poultry composed primarily of JOTS products. Shelf-stable includes canned luncheon meats, shelf-stable microwaveable meals, stews, chilies, hash, meat spreads, flour and corn tortillas, salsas, tortilla chips, peanut butter, and other items that do not require refrigeration. The Other category primarily consists of nutritional food products and supplements.

Competitor Comparison

HRL CAG TSN Industry
Market Cap 17.59B 17.84B 18.72B N/A
Employees 20,600 32,900 113,000 N/A
Qtrly Rev Growth -0.04 0.01 0.04 0.07
Revenue 9.41B 15.86B 40.97B N/A
Gross Margin 0.19 0.22 0.09 0.3
EBITDA 1.18B 2.21B 2.77B N/A
Operating Margin 0.11 0.1 0.05 0.11
Net Income 670.12M -549.40M 1.10B N/A
EPS 2.48 -4.42 2.68 N/A
P/E 26.82 N/A 17.18 20.1
PEG 2.49 2.7 2.12 N/A
P/S 1.85 1.12 0.46 1.64

Hormel Foods Corporation (NYSE: HRL) N.V.

Valuation
Market Cap 17.59B
Enterprise Value 17.68B
P/E 26.82
PEG Ratio 2.49
Price/Sales 1.85
Price/Book 4.43
EV/Revenue 1.88
EV/EBITDA 15.02
Dividend Yield 1.50%
Held by insiders 49.31%
   
HRL
Beta 1.01
1 Month Stock Returns 8.37%
Year to Date Stock Returns 28.48%
1 Year Stock Returns 30.03%
3 Year Stock Returns 33.28%
52-Week Change 25.58%
S&P500 52-Week Change 4.61%
52-Week High 66.69
52-Week Low 50.06
50-Day Moving Average 62.83
200-Day Moving Average 58.99

Highlights

Hormel Foods Corporation produces and markets various meat and food products worldwide. The stock closed yesterday’s trading session at $65.94. In the past year, the stock has hit a 52-week low of $50.06 and 52-week high of $66.69. The intrinsic value of the stock is above the current price. HRL has a market cap of $17.59 billion and is part of the Consumer Goods sector.

HRL Strengths
  • Strong R&D capabilities
  • Strong focus on quality of ingredients  
  • Steady financial performance     
HRL Weakness
  • Dependence on few customers

HRL Intrinsic Value

EPSttm 2.48 Year EPS
EPS GROWTH(Assumption) 1.07 2015 2.66
PE 26.82 2016 2.86
DIVEDEND PAYOUT 38% 2017 3.07
EXPECTED STOCK RETURN 1.066 2018
2019
2020
3.30
3.55
3.81
Forecasted Stock Price in 2022 136.11 2021 4.09
Earnings Per Share after 10th year 5.08 2022
2023
2024
4.40
4.72
5.08
TOTAL EPS 37.55
TOTAL DIVIDENDS 14.27
Forecasted Stock Price in 2022-Dividends 150.38
Net Present Value 79.14
EPS Growth Value
5.92% 69.11
6.42% 72.31
6.92% 75.64
7.42% 79.14
7.92% 82.74
8.42% 86.51
8.92% 90.44
Based on the prospects of the company the valuation range is from $69.11 to $90.44.

Stock Valuation Model & Intrinsic Value Definitions

Current Price Level

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. HRL's 52 week high is $66.69, current price is $65.94, is 1.12% below the 52 week high.

P/E Ratio

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. The company has a P/E ratio of 26.98, the average industry P/E ratio is 20.1, and is above the S&P 500 P/E ratio of 21.53.

Insider Ownership

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders. Insiders own 49.31% of HRL stock. Management's representation is large enough. This does satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

Technical Analysis

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

HRL is trading in the range of $59.87 - $66.79 in the past 30 days. The stock has been showing support around the level of $60 and resistance in the $67 range. The stock is trading above the 50-Day Moving Average and above the 200-Day Moving Average. The RSI(14) is 64.27. After holding for two times around the support level of $55, in March and April of this year, the stock took off and never looked back. In fact looking at a 5 year chart of the stock we can see that it is in a long term bullish trend since late 2012. There is no reason to believe currently that the bullish trend will be over. Our indicators give positive view of HRL.

Financials

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Sentiment

Investor’s sentiment for the stock.

Analyst Ratings

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com are 1 Buy, 1 Outperform, and 5 Hold.

Earnings Consistency

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. HRL’s annual EPS for the last 5 years were 1.46, 1.74, 1.86, 1.95, and 2.23 this type of earnings action is favorable.

Total Debt/Equity

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry. HRL’s Total Debt/Equity of 15.24 is below the required maximum, and it is below the industry average of 58.1.

EPS This Quarter VS Same Quarter Last Year

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. HRL’s EPS growth for this quarter relative to the same quarter a year earlier is 5.88%, below our target.

Annual Earnings Growth

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. HRL’s annual earnings growth rate over the past five years is 12.01%, above our target.

1Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.