Investing in the food industry requires a careful evaluation of companies that exhibit stability, growth potential, and a proven ability to adapt to changing consumer preferences. Hormel Foods Corporation, a well-established player in the industry, exemplifies these qualities. With a rich history spanning over a century, Hormel has consistently shown its ability to innovate and diversify its product portfolio. But is it also a good investment? This is the question I will explore in this analysis.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Hormel. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I do not own any stocks in any of Hormel's direct competitors either. Thus, I have no personal stake in Hormel. If you want to purchase shares or fractional shares of Hormel, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.
The Business
Hormel Foods Corporation, founded in 1891 in Austin, Minnesota, is a global food company renowned for its branded consumer goods. With approximately $12 billion in annual revenue and operations in over 80 countries, Hormel is known for iconic brands such as SPAM, Jennie-O, Skippy, Planters, and Applegate. The company operates through three main segments: retail, contributing 61% of net sales; foodservice, which accounts for 33% of net sales and nearly half of profits due to its high margins; and international, representing 6% of sales. Hormel’s diverse product range includes fresh meats, refrigerated and frozen foods, canned products, nut butters, and plant-based options. These are distributed across U.S. retail, foodservice, and international markets, with a presence in countries such as China, Japan, and Australia. Hormel’s moat is rooted in its strong brand portfolio, which holds leadership positions in numerous categories, ensuring resilience against changes in consumer preferences. Its high-margin foodservice division drives profitability, supported by strong relationships with restaurants, convenience stores, and commercial customers. The company has successfully expanded beyond its traditional meat focus into plant-based foods, organic products, and premium items such as nut butters, demonstrating adaptability to evolving consumer demands. Its extensive distribution network, covering all 50 U.S. states and numerous international markets, ensures wide customer access, further bolstered by strategic partnerships, joint ventures, and royalty arrangements globally. As a Dividend Aristocrat with over 50 consecutive years of dividend increases, Hormel underscores its financial stability and commitment to returning value to shareholders.
Management
Hormel’s CEO, Jim Snee, joined the company in 1989 and has steadily risen through roles of increasing responsibility across its divisions before becoming CEO in 2016. In addition to serving as CEO, he is also the President and Chairman of the Board at Hormel. Jim Snee holds a Bachelor of Arts degree in Marketing from New Mexico State University and a Master’s degree in Business Administration from the University of St. Thomas in St. Paul. He has also participated in executive leadership and management programs at Harvard Business School. As the 10th president and CEO in Hormel’s history, Jim Snee has played a pivotal role in transforming the company into a global branded food powerhouse while emphasizing corporate responsibility and the quality of its food products. Under Jim Snee’s leadership, Hormel has received numerous accolades. The company has been listed on Forbes' “Global 2000 World's Best Employers” for three consecutive years, recognized as one of Fortune magazine's most admired food companies, included in Corporate Responsibility Magazine's “The 100 Best Corporate Citizens” list, and honored as one of America’s Most Responsible Companies by Newsweek, among other distinctions. In 2021, Jim Snee was also given an honorable mention as one of the most responsible CEOs by PR Week Magazine. Jim Snee has overseen Hormel’s strategic growth through both organic initiatives and acquisitions, expanding the company’s product portfolio significantly. One of the most notable expansions under his tenure is the acquisition of the Planters snack nuts business, which has strengthened Hormel’s presence in the growing snacking category. I believe Jim Snee’s credentials, leadership, and track record demonstrate that he is the right person to guide Hormel into the future.
The Numbers
The first metric we will investigate is the return on invested capital (ROIC). Ideally, a 10-year history demonstrating a minimum annual ROIC of 10% would be preferable. Hormel has historically achieved a ROIC above 10% in most years, which is encouraging. However, it is concerning that ROIC has declined in recent years, and Hormel has not achieved a ROIC above 10% since 2020. Factors such as the Planters acquisition, strategic investments aimed at modernizing operations, and macroeconomic conditions have contributed to this decline over the past four years. While the ROIC has remained in the high single digits, it is noteworthy that fiscal year 2024 marks the lowest levels of ROIC in the past decade. Management has acknowledged these challenges and expressed optimism that their long-term strategies will help stabilize and improve ROIC over time. Moving forward, it will be important to monitor whether management can successfully address these issues and increase the ROIC.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. These numbers are far more encouraging than the ROIC. Hormel serves as a textbook example of how equity growth should look in a company, as equity has increased every year for the past 10 years. The only slightly concerning factor is that the growth rate has slowed and is not nearly as high year over year as it was previously. However, it is worth noting that year-over-year growth improved in fiscal year 2024 compared to fiscal year 2023. Hopefully, this marks the beginning of a positive trend that will continue moving forward.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is unsurprising that Hormel has consistently generated positive free cash flow every year for the past decade. Free cash flow has remained relatively stable over the years, despite challenges such as acquisitions, a pandemic, and high inflation. Encouragingly, Hormel delivered its highest free cash flow ever in fiscal year 2024. Management has expressed confidence that their focus on innovative projects and brand investments will support sustained free cash flow generation in the long term. Hormel utilizes a portion of its free cash flow to pay dividends, enabling the company to increase dividends for 59 consecutive years. The levered free cash flow margin also increased in fiscal year 2024, reaching its highest level since 2018, which is another positive development. Additionally, the free cash flow yield is at its highest level in the past decade, suggesting that the stock is trading at an attractive valuation - something we will revisit later in this analysis.
Debt
Another important aspect to consider is the level of debt. It is crucial to assess whether a business has manageable debt that can be repaid within a three-year period. This is calculated by dividing total long-term debt by earnings. After analyzing Hormel's financials, I found that the company has 3,54 years' worth of earnings in debt, slightly exceeding the three-year threshold. While these numbers are not alarming, I believe that debt levels warrant monitoring moving forward to ensure they remain manageable.
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Risks
Competition poses a significant risk for Hormel Foods Corporation due to the intensely competitive nature of the meat and food production industry, both domestically and internationally. Hormel faces a wide range of competitors, including manufacturers of pork and turkey products, national and regional producers of other protein sources such as beef, chicken, fish, nuts, and plant-based proteins, as well as private label producers. This extensive competition intensifies market dynamics, particularly in areas such as pricing, product quality, and brand recognition. One core challenge for Hormel is its limited pricing power. Hormel’s products are often priced at a premium to reflect their brand value and quality. However, if competitors lower their prices, Hormel’s profitability could be at risk, as consumers, especially in price-sensitive segments, may opt for cheaper alternatives. Private label products, typically offered at lower prices, further exacerbate this risk. Retailers’ continued expansion of private label lines to meet consumer demand for affordable options adds to the pressure. To remain competitive, Hormel must not only manage pricing but also demonstrate the value of its products. This value is increasingly defined by factors such as product quality, sustainability of sourcing, and animal welfare - trends that are reshaping consumer preferences. Failing to align with these expectations could weaken Hormel’s competitive position in the market.
General risks in the food industry pose a significant challenge for Hormel Foods Corporation due to the inherent vulnerabilities associated with food production and distribution. The food industry faces a variety of risks, including contamination from pathogens such as Listeria monocytogenes, Salmonella, and E. coli, as well as issues like spoilage, mislabeling (especially concerning allergens), and claims of false or deceptive advertising. These risks can have immediate and severe consequences for Hormel, ranging from regulatory penalties and consumer lawsuits to reputational damage. Foodborne pathogens are a persistent concern, as they are naturally present in livestock and the environment, making complete elimination nearly impossible. Although Hormel employs stringent quality assurance measures during processing, the risk of contamination can also arise from factors beyond its control, such as improper handling by distributors, retailers, or consumers. Even a single contamination event, such as the recent voluntary recall of Planters products due to potential Listeria contamination, can lead to significant financial costs, sales losses, and reputational harm - even if no illnesses occur. Additionally, product tampering or mislabeling, particularly involving allergens, heightens Hormel’s exposure to risk. Mislabeling could result in severe consumer reactions, liability claims, and regulatory action, further amplifying the company’s vulnerability.
Customer concentration poses a significant risk for Hormel Foods Corporation due to its dependence on a few key customers for a substantial portion of its revenue. In fiscal 2024, Walmart alone accounted for approximately 16% of Hormel’s consolidated gross sales, with the top five customers collectively representing 37% of total gross sales. This reliance creates a vulnerability, as the loss of any one of these major customers - or a reduction in the volume of their orders - could materially impact Hormel’s financial performance. Large retailers like Walmart wield considerable bargaining power, often pressuring Hormel to provide favorable pricing, promotional allowances, or contract terms. This dynamic can limit Hormel’s ability to maintain or improve margins, particularly in an industry already marked by intense competition and limited pricing flexibility. Additionally, shifts in purchasing strategies by such large customers - such as increased focus on private-label products or sourcing from competitors - could erode Hormel’s market share and sales volumes. This concentration risk extends beyond immediate revenue loss and can have broader operational consequences. For instance, losing a top customer in the Retail segment could disrupt production efficiency, requiring adjustments to production volumes. This, in turn, could lead to higher per-unit costs and reduced profitability. Similarly, in the International segment, losing a major customer could destabilize distribution networks and weaken Hormel’s competitive position in key global markets. These ripple effects further amplify the risks associated with customer concentration.
Reasons to invest
The Foodservice segment is a compelling reason to invest in Hormel Foods Corporation due to its strong profitability, above-industry growth, and differentiated approach. As Hormel’s most profitable segment, it contributes nearly half of the company’s profits despite representing a smaller share of total sales. This highlights its high-margin nature, driven by innovative solutions designed to address the evolving needs of foodservice operators. A key asset within the segment is Hormel’s dedicated direct sales force, which fosters deep relationships with customers across a variety of sectors, including restaurants, lodging, and convenience stores. These connections allow Hormel to develop tailored products like Flash 180 Chicken and Hormel Ribbon Pepperoni, which address labor and time constraints while enhancing menu flexibility. The segment’s growth is further fueled by premium prepared proteins, pizza toppings, and snacking products, supported by strategic investments in capacity expansion and operational efficiency. With a continued focus on innovation, strategic partnerships, and a strong presence across multiple channels, the Foodservice segment is well-positioned to maintain its growth trajectory. Its high margins, combined with broad-based category growth and customer-centric strategies, make the Foodservice segment a vital driver of Hormel’s long-term profitability.
Hormel’s international markets offer a compelling reason to invest, providing higher margins than U.S. retail and substantial growth opportunities. The company is actively expanding its global footprint by leveraging well-established brands like SPAM, Skippy, and Hormel to scale operations in key regions. Its strategy focuses on replicating a balanced and successful business model in markets such as China, Brazil, South Korea, Europe, and the Philippines, while also extending its reach into high-growth regions like Southeast Asia through strategic partnerships, including its investment in Garudafood. Recent developments underscore Hormel’s commitment to innovation and localization. In China, the company’s innovation center has fueled strong recovery, with tailored product launches driving business growth in the region. Likewise, the partnership with Garudafood has enabled Hormel to introduce Skippy-branded snacks in Indonesia and expand Garudafood’s product portfolio into international markets such as Mexico and China, advancing Hormel’s global snacking vision. Hormel’s adaptability to local tastes is further exemplified in Japan, where its expanded partnership with FamilyMart has introduced SPAM musubi and other Hawaii-inspired snacks, generating substantial sales. These initiatives demonstrate Hormel’s ability to align its products with regional preferences while preserving the strength of its global brand. As the International segment continues to benefit from strategic investments, brand recognition, and innovative localization efforts, it holds significant growth potential.
The Transform and Modernize (T&M) initiative is a compelling reason to consider investing in Hormel, as it represents a comprehensive strategy to reshape operations and drive sustainable growth. In its first year, the initiative generated $75 million in operating income benefits, with an additional $100–$150 million projected for fiscal 2025, underscoring its significant impact on Hormel’s financial performance and long-term potential. T&M is more than a cost-saving program; it is a holistic strategy built around five core pillars: Plan, Buy, Make, Move, and Portfolio Optimization. These pillars aim to enhance the entire value chain by incorporating intelligent automation, streamlining processes, and fostering data-driven decision-making. By reducing complexity and improving margins, the initiative creates a “growth flywheel,” enabling reinvestments in people, technology, and innovation to sustain expansion. Key achievements include optimizing procurement to lower costs and increase cash flow, standardizing manufacturing practices to boost capacity and efficiency, and enhancing logistics to reduce expenses. The Portfolio Optimization pillar has been particularly impactful, focusing on eliminating unprofitable SKUs and prioritizing higher-margin, consumer-centric products and innovation. Through centralized planning, advanced analytics, and AI integration, Hormel is evolving into a leaner and more agile organization capable of delivering predictable, profitable growth well beyond 2026.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 1,47, which is from the fiscal year 2024. I have selected a projected future EPS growth rate of 5%. Finbox expects EPS to grow by an average of 5,1% in the next 5 years. Additionally, I have selected a projected future P/E ratio of 10, which is double the growth rate. This decision is based on Hormel's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $5,92 We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Hormel at a price of $2,96 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.177, and capital expenditures were 274. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 192 in our calculations. The tax provision was 231. We have 548,6 outstanding shares. Hence, the calculation will be as follows: (1.177 – 192 + 231) / 548,4 x 10 = $22,17 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Hormel's free cash flow per share at $1,84 and a growth rate of 5%, if you want to recoup your investment in 8 years, the Payback Time price is $18,45.
Conclusion
Hormel Foods is an intriguing company with strong management and a robust brand portfolio that provides a competitive moat. While the company’s return on invested capital (ROIC) has been low over the past four years, management is optimistic about future improvements. Encouragingly, Hormel recently delivered its highest free cash flow ever, with its levered free cash flow margin reaching its highest level since 2018. However, the company faces notable challenges. Competition remains a significant risk due to the highly competitive nature of the food production industry, where Hormel is pressured by private-label brands and limited pricing power. Additionally, the food industry’s general risks - such as contamination, spoilage, and mislabeling - pose potential financial and reputational threats. Customer concentration is another concern, with Walmart accounting for 16% of Hormel’s revenue in fiscal 2024 and the top five customers collectively representing 37%. This reliance leaves Hormel vulnerable to shifts in major customer relationships or purchasing strategies. On a positive note, Hormel’s Foodservice segment stands out as its most profitable division, driving nearly half of the company’s profits through innovative solutions and strategic partnerships. Its international markets also offer higher margins and substantial growth opportunities, supported by localized innovation and strategic investments. Additionally, the Transform and Modernize initiative positions Hormel for long-term growth by delivering significant operating income benefits and creating a more efficient, scalable organization. While Hormel’s stability and strong cash flow may appeal to dividend investors, I am personally deterred by its low growth and historically low ROIC. Given these factors, I believe there are better investment opportunities available, and I will not be investing in Hormel at this time.
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