In this article, let's take a look at Hormel Foods Corporation (HRL, Financial), a $13.12 billion market cap company, which is a multinational manufacturer and marketer of consumer-branded food and meat products.
A large portfolio
The company has a large portfolio of protein brands. It is characterized by having higher prices than competitors while maintaining a leading position. The firm has managed to gain excess returns, and it could maintain in the future a ROIC of 20% which we think is very attractive.
Management has focused on brand innovation in order to identify new opportunities. Examples include, creating new protein-meals (e.g., Rev Wraps), or expanding product with health-conscious brands like Jennie-O, or growing in underpenetrated distribution channels.
Management plans a long-term target of 5% sales and 10% earnings growth. So as to reach those levels, we think it will be appropriate to make some acquisitions. This is not new for the firm; in the past it has spent over 30% of its cumulative free cash flow on them.
At the end of last year, it completed the acquisition of Skippy peanut butter business which we think is an interesting strategic move. The China-based Skippy business was also acquired and annual sales for Skippy were expected to be about $370 million.
International operations
Talking about markets abroad, the firm markets its products through Hormel Foods International Corporation. The company focuses on countries such as Australia, Canada, China, England, Japan, Mexico, Micronesia, the Philippines and South Korea.
Further, through the mechanism of royalty basis, Hormel licensed other companies to make products, with the primary licensees being Tulip International of Denmark and CJ CheilJedang Corporation of South Korea.
Revenues, margins and profitability
Looking at profitability, revenue growth by 5.80% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.51 vs $0.42). During the past fiscal year, the company increased its bottom line. It earned $1.94 versus $1.86 in the prior year. This year, Wall Street expects an improvement in earnings ($2.23 versus $1.94).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| HRL | Hormel | 16.49 |
| MKC | McCormick&CompanyInc | 20.34 |
| PPC | Pilgrims Pride Corp | 33.47 |
| HSY | The Hershey Co | 54.34 |
| Â | Industry Median | 8.11 |
The company has a current ROE of 16.49% which is higher than the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels, McCormick & Company Inc (MKC, Financial) could be the option. For investors looking at higher levels, we have Pilgrims Pride Corp (PPC, Financial) and The Hershey Co (HSY, Financial).
It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 22.9x, trading at a premium compared to an average of 22.7x for the industry. To use another metric, its price-to-book ratio of 3.7x indicates a premium versus the industry average of 2.04x while the price-to-sales ratio of 1.5x is above the industry average of 1.08x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $30,198, which represents a 24.7% compound annual growth rate (CAGR).
Final comment
As outlined in the article, the firm earns profits while supporting its brand portfolio, which helps to constantly look forward brand innovation. We think that new strategic acquisitions as well as continuing operations in promising countries will help to boost company´s revenues.
Hedge fund gurus like Jim Simons (Trades, Portfolio), Chuck Royce (Trades, Portfolio), and Jeremy Grantham (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
