Analysis – Hormel Foods Corp

General overview

Hormel Foods Corp general overview as per 4th of September 2017:

Price: $ 30,91
Dividend: $ 0,68
Dividend yield: 2,20%
Market capitalization: 16,3B

Description

A Delaware corporation (the Company), was founded by George A. Hormel in 1891 in Austin, Minnesota, as George A. Hormel & Company. The Company 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. Although pork and turkey remain the major raw materials for Hormel products, the Company has emphasized for several years the manufacture and distribution of branded, value-added consumer items rather than the commodity fresh meat business.

The Company’s business is reported in five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, International & Other. Domestically, the Company sells its products in all 50 states through Company sales personnel, independent brokers, and distributors. Through Hormel Foods International Corporation, the Company markets its products in various locations throughout the world. Some of the larger markets include Australia, Canada, China, England, Japan, Mexico, and Micronesia. Products are sold to retailers, wholesalers, food service distributors and operators, and other outlets worldwide.

 

Analysis

To analyse a stock I use a very simple formula borrowed from the book “The Single Best Investment” written by Lowell Miller (I will probably write a book review later). This formula works as follows:

High quality
+High current yield
+High growth of yield
=High total returns

Following from the formula I analyse stocks while looking at each of the parts of this formula.

 

High quality

The first question when looking at the formula is: “How do you define high quality”. This of course depends on the circumstances in the market at this moment, but we can set some general guidelines. We divide high quality in the following parts:

  • Financial strength
    • Low debt
    • Strong cash flow
    • Credit worthiness
  • Management quality

Financial strength

Low debt

Miller sets a couple of standards for low debt:

  • debt / equity ratio under 50%
  • Cash flow after taxes at least 3 times the amount of interest the company pays

When we look at Hormel Foods Corp, then we see a debt / equity ratio of 0.05 (source ycharts). This debt is really low and this means Hormel Foods has a superb score on this part. This keeps the interest rates low and therefore the company has less risk for rising interest rates. Hormel Foods Corp passed on this criteria.

According to Morningstar the interest coverage ratio is 103,34 for 2016. This is the net profit after taxes divided by the cost of net financial debt. This ratio is very high mainly due to the low debt and therefore this is very solid for Hormel Foods. So the company passes this criteria with ease.

Strong cash flow

The standards for strong cash flow are:

  • Annual earnings growth should be consistent and in the 5-10% range minimum.
  • Payout ratio should be less than 60%.

The results of Hormel Foods in the last 5 years looks as follows:

As you can see in the chart the earnings and the turnover keeps growing at a nice rate. There is a small setback in 2016 which probably explains the recent pricing pressure on the stock, however I believe that to be temporary which means the pricing pressure is more of a buying opportunity.

 

The pay out ratio of Hormel Foods is currently sitting at 38% which is well below our target of 60%. Although the dividend is growing at a great pace the pay out ratio is quite stable which means the growth is covered by growth in earnings per share which is a great sign.

All in all the growth in earnings is nice and the pay out ratio is excellent, so the company passes on this part.

Creditworthiness

According to Standard & Poor Hormel Foods Corp has a A rating with a stable outlook. We have set a minimum of BBB+ and therefore the company passes.

 

Management quality

This part is much more difficult to analyze. However, there are certain factors from which you can see the quality of the management. It is important that management never lies, that the company absorbs acquisitions in a good way, that the company can extend its brands and that the company has a certain franchise or niche.

Looking at the track record of Hormel Foods we can pretty safely assume that management is doing a good job in general and that they have the best intentions with shareholders. We can conclude this because the company is very generous towards shareholders with a 51 year streak of increasing dividends and because the company grows nicely through acquisitions over the last years.

Like I said, this part is hard to analyze, but during my search I didn’t find anything that is bad for the company.

 

High current yield

At the moment the dividend yield of Hormel Foods Corp is 2,20% based upon todays price and the 2017 payout. Our goal is to have a dividend yield of 3% or higher, so the company doesn’t pass on this metric. On the other hand, the dividend grows very rapidly as we can see below. Therefore Hormel Foods can be seen as a growth stock on the dividend part which could turn out very nice since I still have a long time to go before I need the money I earn from investing.

High growth of yield

Hormel Foods Corp pays a dividend once per quarter. The company also has raised the dividend each year for 51 consecutive years! Here is a graph of the dividends paid that I found on the investor relations page of the company:

We are looking for a minimum growth of dividend of 5% per year. Looking at the graph Hormel Foods more than delivers this minimum growth. In the last 10 years the Compounded Annual Growth rate of the dividend was a whopping 15,3% a year! This could also help to offset the slightly lower dividend yield of 2,20%. Here is the graph of het last 10 years with the numbers:

 

Valuation

Looking at all of the above we have a quite good image of the quality of the company. However, a good company bought at the wrong price is still not a good buy. Therefore, we also have to look at the valuation of the company. Miller has a set of guidelines for valuation. He uses:

  • Price / sales ratio below 1,5
  • Price / earnings ratio less than the market or less than 100 / long term bond rate, whichever is lower. Also, it is a big plus if the P/E is lower than the average of the company.
  • Book value. The lower the better, but no set of guidelines.
  • Cash and cash equivalents must be higher than last year at this time.
Price / sales

The price / sales ratio is 1,8 for Hormel Foods Corp. Therefore it doesn’t pass the above requirements, but it doesn’t miss by much. The 1.8 rating is the same as the average industry rating and Hormel Foods traditionally trades above the average, so it still looks like a not so bad deal. Therefore a higher price / sales ratio could be warranted. But since I’m not a financial man this is hard to judge for me.

Price / earnings

The price / earnings ratio of LVMH is 19.7 at this moment which is nicely below the 5 year average of 20,7 for the company which you can see in the graph below. The P/E ratio of the S&P500 is 24.69 as of Friday the 1st of September. So Hormel Foods Corp is well below the market average. It seems the company is undervalued from a P/E point of view.

Book value

The price to book value is 3.5 which is above the industry average. In the past 5 years the average price to book value was 3.9 so compared to the average the company seems a little bit undervalued again.

Cash and cash equivalents

Looking at the balance sheet, we see that total current assets have decreased from 2,06 billion to 2,03 billion in 2016. Total assets have risen from 6,14 billion to 6,37 billion. So liquid asses stayed roughly the same while total assets increased. I would like to see both increase, but still it’s not bad. Therefore the company passes on this measurement.

 

Conclusion

When I look at Hormel Foods Corp I see an interesting company that sells goods that everybody needs. In good economic times and in bad economic times. The 51 year growth streak in the dividend shows that the above statement is true for Hormel Foods Corp. Therefore Hormel Foods is a very interesting company to own shares in.

However, those shares need to be priced attractively. Hormel Foods had a lot of pricing pressure in the last couple of months. Because of that the normal highly valued shares have come down. The dividend yield is high for the company at the moment and the P/E is low. In my eyes the company looks attractively valued and if they can continue growth again in the coming years, even undervalued.

 

What do you think about this analysis and about the company? Would you buy the stock? Do you think the valuation is good at this moment? Or do you think there are more interesting alternatives out there? Which stock would you recommend? I’m curious to your opinions!

All in all, I may initiate a position in the company within a couple of days. If I do, then I keep you posted!

 

 

Disclaimer: While I have used reasonable efforts to obtain information from reliable sources, I make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.

 

4 thoughts on “Analysis – Hormel Foods Corp”

  1. Thanks for sharing this analysis of HRL. It’s a pretty new position in my portfolio and seeing it yield 2%+ is on the historical high side which enticed me to buy. About fairly valued around $30 +/- in my opinion, plenty of room to continue to pay and raise the dividend and slowly diversifying their product offerings to match changing consumer tastes. I like!

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