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Hormel Foods (HRL) Research Report: Q1 CY2024 Update


Full Report / May 30, 2024

Packaged foods company Hormel (NYSE:HRL) fell short of analysts' expectations in Q1 CY2024, with revenue down 3% year on year to $2.89 billion. On the other hand, the company's outlook for the full year was close to analysts' estimates with revenue guided to $12.35 billion at the midpoint. It made a non-GAAP profit of $0.38 per share, down from its profit of $0.40 per share in the same quarter last year.

Hormel Foods (HRL) Q1 CY2024 Highlights:

  • Revenue: $2.89 billion vs analyst estimates of $2.97 billion (2.7% miss)
  • EPS (non-GAAP): $0.38 vs analyst estimates of $0.36 (6% beat)
  • The company reconfirmed its revenue guidance for the full year of $12.35 billion at the midpoint
  • Gross Margin (GAAP): 17.4%, up from 16.5% in the same quarter last year
  • Free Cash Flow of $176.2 million, down 50.6% from the previous quarter
  • Sales Volumes fell 3.6% year on year
  • (-5.6% in the same quarter last year)
  • Market Capitalization: $18.68 billion

Best known for its SPAM brand, Hormel (NYSE:HRL) is a packaged foods company with products that span meat, poultry, shelf-stable foods, and spreads.

Established in 1891 by George A. Hormel, the company started as a meatpacking operation. Throughout its history, Hormel has grown its business and expanded its portfolio through organic development as well as through mergers and acquisitions. The 1936 acquisition of SPAM was transformative, as was the 2013 deal to bring Skippy peanut butter into the portfolio.

In addition to its namesake brand, SPAM, and Skippy, the company also boasts the Planters (nuts), Applegate Farms (meats), Jennie-O (meats), and Justin’s (spreads and snacks) brands. Hormel caters to low to middle-income households seeking convenience through trusted brands. The heads or caretakers of these households are usually busy and don’t have the time to cook meals or prepare snacks from scratch. The company’s products add convenience to everyday life, and they are often brands that customers have been eating since childhood.

Hormel products enjoy wide distribution. Supermarkets and grocery stores are the most common sellers of the company’s products, but consumers can also find brands such as SPAM and Skippy in mass merchandisers and discount retailers that carry food.

Shelf-Stable Food

As America industrialized and moved away from an agricultural economy, people faced more demands on their time. Packaged foods emerged as a solution offering convenience to the evolving American family, whether it be canned goods or snacks. Today, Americans seek brands that are high in quality, reliable, and reasonably priced. Furthermore, there's a growing emphasis on health-conscious and sustainable food options. Packaged food stocks are considered resilient investments. People always need to eat, so these companies can enjoy consistent demand as long as they stay on top of changing consumer preferences. The industry spans from multinational corporations to smaller specialized firms and is subject to food safety and labeling regulations.

Competitors in packaged food with a focus on meat include Kraft Heinz (NASDAQ:KHC), Tyson (NYSE:TSN), and Pilgrim’s Pride (NASDAQ:PPC).

Sales Growth

Hormel Foods is one of the larger consumer staples companies and benefits from a well-known brand, giving it customer mindshare and influence over purchasing decisions.

As you can see below, the company's annualized revenue growth rate of 6.9% over the last three years was mediocre for a consumer staples business.

Hormel Foods Total Revenue

This quarter, Hormel Foods missed Wall Street's estimates and reported a rather uninspiring 3% year-on-year revenue decline, generating $2.89 billion in revenue. Looking ahead, Wall Street expects sales to grow 2.4% over the next 12 months, an acceleration from this quarter.

Volume Growth

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

Hormel Foods's average quarterly sales volumes have shrunk by 4.5% over the last two years. This decrease isn't ideal because the quantity demanded for consumer staples products is typically stable.

Hormel Foods Year-On-Year Volume Growth

In Hormel Foods's Q1 2024, sales volumes dropped 3.6% year on year. This result was a further deceleration from the 5.6% year-on-year decline it posted 12 months ago, showing the business is struggling to push its products.

Gross Margin & Pricing Power

This quarter, Hormel Foods's gross profit margin was 17.4%, in line with the same quarter last year. That means for every $1 in revenue, a chunky $0.83 went towards paying for raw materials, production of goods, and distribution expenses.

Hormel Foods Gross Margin (GAAP)

Hormel Foods has poor unit economics for a consumer staples company, leaving it with little room for error if things go awry. As you can see above, it's averaged a paltry 16.8% gross margin over the last two years. Its margin has also been consistent over the last year, suggesting it will take a fundamental shift in the business to change meaningfully.

Operating Margin

Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.

This quarter, Hormel Foods generated an operating profit margin of 8.7%, down 1.2 percentage points year on year. Conversely, the company's gross margin actually increased, so we can assume the reduction was driven by operational inefficiencies and a step up in discretionary spending in areas like corporate overhead and advertising.

Hormel Foods Operating Margin (GAAP)

Zooming out, Hormel Foods has done a decent job managing its expenses over the last eight quarters. The company has produced an average operating margin of 9.7%, higher than the broader consumer staples sector. On top of that, its margin has remained more or less the same, highlighting the consistency of its business.

The company's operating profitability was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes tectonic shifts to move meaningfully. Companies have more control over their operating margins, and it signals strength if they're high when gross margins are low (like for Hormel Foods).

EPS

Analyzing revenue trends tells us about a company's historical growth, but earnings per share (EPS) growth points to the profitability of that growth–for example, a company could inflate sales through excessive spending on advertising and promotions.

Hormel Foods's flat EPS over the last three years was below its 6.9% annualized revenue growth. This tells us its incremental sales were unprofitable.

Hormel Foods EPS (Adjusted)

We can delve even further into Hormel Foods's earnings performance. Hormel Foods's operating margin has declined 2.4 percentage points over the last three years. This was the most relevant factor (aside from revenue) behind its lower earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.

In Q1, Hormel Foods reported EPS at $0.38, down from $0.40 in the same quarter last year. Despite falling year on year, this print beat analysts' estimates by 6%. Over the next 12 months, Wall Street expects Hormel Foods's EPS of $1.61 in the last year to stay about the same.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Hormel Foods's free cash flow came in at $176.2 million in Q1, up 13.9% year on year. This result represents a 6.1% margin.

Hormel Foods Free Cash Flow Margin

Over the last two years, Hormel Foods has shown decent cash profitability, giving it some reinvestment opportunities. The company's free cash flow margin has averaged 7.1%, slightly better than the broader consumer staples sector. Furthermore, its margin has averaged year-on-year increases of 2.3 percentage points over the last 12 months. This likely pleases the company's investors.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was its growth capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money it has raised (debt and equity).

Hormel Foods's five-year average ROIC was 11.9%, slightly better than the broader sector. Just as you’d like your investment dollars to generate returns, Hormel Foods's invested capital has produced decent profits.

Hormel Foods Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Unfortunately, Hormel Foods's ROIC averaged 6.1 percentage point decreases each year over the last few years. We like what management has done in the past but are concerned its ROIC is declining, perhaps a symptom of fewer profitable business opportunities.

Balance Sheet Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly.

Hormel Foods reported $1.51 billion of cash and $3.81 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $1.41 billion of EBITDA over the last 12 months, we view Hormel Foods's 1.6x net-debt-to-EBITDA ratio as safe. We also see its $24.08 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from Hormel Foods's Q1 Results

We were impressed by how significantly Hormel Foods blew past analysts' gross margin expectations this quarter. We were also glad its full-year revenue guidance came in higher than Wall Street's estimates. On the other hand, this quarter's revenue and operating margin missed Wall Street's estimates, but the market doesn't seem to care because of the strong outlook. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is up 2.6% after reporting and currently trades at $35 per share.

Is Now The Time?

Hormel Foods may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Hormel Foods, we'll be cheering from the sidelines. Its revenue growth has been mediocre over the last three years, and analysts expect growth to deteriorate from here. And while its well-known brand makes it a household name consumers consistently turn to, the downside is its shrinking sales volumes suggest it'll need to change its strategy to succeed. On top of that, its gross margins make it more challenging to reach positive operating profits compared to other consumer staples businesses.

Hormel Foods's price-to-earnings ratio based on the next 12 months is 21.1x. While we've no doubt one can find things to like about Hormel Foods, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

Wall Street analysts covering the company had a one-year price target of $31.78 per share right before these results (compared to the current share price of $35), implying they didn't see much short-term potential in Hormel Foods.

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